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

See all articles by Vikas Agarwal

Vikas Agarwal

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

Haibei Zhao

Lehigh University

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

Agarwal, Vikas and Zhao, Haibei, Interfund Lending in Mutual Fund Families: Role in Liquidity Management (December 26, 2018). Review of Financial Studies, Forthcoming. 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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