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The Invisible Hand of Internal Markets in Mutual Fund Families

70 Pages Posted: 10 Mar 2010 Last revised: 23 Nov 2016

Luis Goncalves-Pinto

Chinese University of Hong Kong - Department of Finance

Juan M. Sotes-Paladino

University of Melbourne - Department of Finance

Date Written: November 22, 2016

Abstract

The internal markets of fund families can induce member funds to deviate excessively from their investment mandates. Theoretically, we show that fund managers who follow sufficiently different style benchmarks are likely to engage in risk-shifting by trading with one another at low cost inside their family. This benefits the managers and the family even in the absence of a family-level strategy. However, the excessive risks taken by the managers can be costly to fund investors. Empirically, we find support for the positive effect of intra-family style diversity on offsetting trades across funds and on deviations of funds' portfolios from their benchmarks.

Keywords: Mutual Fund Families, Cross-trading, Portfolio Delegation, Illiquidity

JEL Classification: C61, D60, D81, G11, G12, G23

Suggested Citation

Goncalves-Pinto, Luis and Sotes-Paladino, Juan M., The Invisible Hand of Internal Markets in Mutual Fund Families (November 22, 2016). 28th Australasian Finance and Banking Conference. Available at SSRN: https://ssrn.com/abstract=1567267 or http://dx.doi.org/10.2139/ssrn.1567267

Luis Goncalves-Pinto (Contact Author)

Chinese University of Hong Kong - Department of Finance ( email )

Cheng Yu Tung Building
Shatin
Hong Kong
Hong Kong

Juan M. Sotes-Paladino

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia
+61 3 9035 9827 (Phone)
+61 3834 6914 (Fax)

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