Interfund Lending in Mutual Fund Families: Role in Liquidity Management

69 Pages Posted: 16 Aug 2015 Last revised: 7 Jun 2018

Vikas Agarwal

Georgia State University; University of Cologne - Centre for Financial Research (CFR)

Haibei Zhao

Lehigh University

Date Written: May 26, 2018

Abstract

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

Agarwal, Vikas and Zhao, Haibei, Interfund Lending in Mutual Fund Families: Role in Liquidity Management (May 26, 2018). Available at SSRN: https://ssrn.com/abstract=2644605 or http://dx.doi.org/10.2139/ssrn.2644605

Vikas Agarwal (Contact Author)

Georgia State University ( email )

35 Broad Street,
Suite 1221
Atlanta, GA 30303-3083
United States
404-413-7326 (Phone)
404-413-7312 (Fax)

HOME PAGE: http://www.gsu.edu/~fncvaa

University of Cologne - Centre for Financial Research (CFR)

Albertus-Magnus Platz
Cologne, 50923
Germany

Haibei Zhao

Lehigh University ( email )

621 Taylor Street, RBC 323
Bethlehem, PA PA 18018
United States

HOME PAGE: http://https://sites.google.com/a/lehigh.edu/haibei/

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