Interfund Lending in Mutual Fund Families: Role in Liquidity Management
69 Pages Posted: 16 Aug 2015 Last revised: 7 Jun 2018
Date Written: May 26, 2018
Although the 1940 Act restricts interfund lending within a mutual fund family, families can apply for regulatory exemptions to participate in interfund lending. We find that the monitoring mechanisms and investment restrictions influence the family’s decision to apply for interfund lending. We document several implications of interfund lending. First, participating funds reduce their cash holdings, increase their investments in illiquid assets, and take excessive risks. Second, investors in participating funds exhibit weaker flow-performance sensitivity and run-like behavior. Third, participating funds help mitigate asset fire sales subsequent to extreme investor redemptions. Lastly, money market funds in participating families experience outflows.
Keywords: interfund lending, financial fragility, liquidity management
JEL Classification: G28, G23, G32
Suggested Citation: Suggested Citation