Interfund Lending in Mutual Fund Families: Role in Liquidity Management
Review of Financial Studies, Forthcoming
68 Pages Posted: 16 Aug 2015 Last revised: 29 Nov 2018
Date Written: November 28, 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 benefits of interfund lending for the equity funds. First, participating funds reduce cash holdings and increase investments in illiquid assets. Second, investors in participating funds exhibit less run-like behavior. Third, it helps mitigate asset fire sales for participating funds subsequent to 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