Interfund Lending in Mutual Fund Families: Role in Liquidity Management
68 Pages Posted: 16 Aug 2015 Last revised: 29 Nov 2017
Date Written: November 17, 2017
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 consequences of interfund lending. First, funds participating in interfund lending programs reduce their cash holdings and increase their investments in illiquid assets. Second, investors in participating funds exhibit less run-like behavior as indicated by weaker flow-performance sensitivity. Third, participating funds help mitigate asset fire sales caused by extreme investor outflows.
Keywords: Funding liquidity, fund families, liquidity management
JEL Classification: G18, G23, G32
Suggested Citation: Suggested Citation