Investment Restrictions and Fund Performance

48 Pages Posted: 24 Aug 2014

See all articles by Christopher P. Clifford

Christopher P. Clifford

University of Kentucky

Jon A. Fulkerson

University of Dayton

Xin Hong

University of Kentucky

Bradford D. Jordan

University of Florida; University of Florida - Department of Finance, Insurance and Real Estate

Date Written: August 22, 2014

Abstract

We examine why mutual funds appear to underperform hedge funds. Utilizing a unique panel of mutual fund contracts changes, we explore several possible channels, including: alternative investment practices (e.g., short sales and leverage), performance-based compensation, and the ability to restrict the funding risk of fund flows. We document that over our sample period, mutual funds were more likely to shift their contracting environment closer to that of hedge funds. However, this shift provided no benefit to mutual funds and we find no causal link between these contract changes and improvements in performance. Rather, our results cast doubt on the binding nature of investment restrictions in the mutual fund industry.

Keywords: Mutual funds; Hedge funds; Limits to arbitrage

JEL Classification: G23, G32

Suggested Citation

Clifford, Christopher P. and Fulkerson, Jon A. and Hong, Xin and Jordan, Bradford D., Investment Restrictions and Fund Performance (August 22, 2014). Available at SSRN: https://ssrn.com/abstract=2485518 or http://dx.doi.org/10.2139/ssrn.2485518

Christopher P. Clifford

University of Kentucky ( email )

College of Business & Economics
Lexington, KY 40506-0034
United States
859-257-3850 (Phone)

Jon A. Fulkerson

University of Dayton ( email )

300 College Park
Dayton, OH 45469
United States

Xin Hong (Contact Author)

University of Kentucky ( email )

Lexington, KY 40506
United States

Bradford D. Jordan

University of Florida ( email )

Gainesilee, FL 40506
United States

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

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