Interfund Lending in Mutual Fund Families: Role in Liquidity Management
Review of Financial Studies, Forthcoming
68 Pages Posted: 16 Aug 2015 Last revised: 28 Dec 2018
Date Written: December 26, 2018
Abstract
The Investment Company Act of 1940 restricts interfund lending and borrowing within a mutual fund family, but families can apply for regulatory exemptions to participate in such transactions. We find that the monitoring mechanisms and investment restrictions influence the family’s decision to apply for the interfund lending programs. We document several benefits of such programs for equity funds. First, participating funds reduce cash holdings and increase investments in illiquid assets. Second, fund investors exhibit less run-like behavior. Third, it helps mitigate asset fire sales after extreme investor redemptions. Offsetting these benefits, money market funds in participating families experience investor outflows.
Keywords: interfund lending, fire sales, financial fragility, liquidity management
JEL Classification: G28, G23, G32
Suggested Citation: Suggested Citation