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Playing Favorites: Conflicts of Interest in Mutual Fund Management

53 Pages Posted: 4 May 2016 Last revised: 10 Jun 2017

Diane Del Guercio

University of Oregon, Lundquist College of Business; European Corporate Governance Institute (ECGI)

Egemen Genc

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM)

Hai Tran

Loyola Marymount University

Date Written: March 23, 2017

Abstract

We examine the performance of mutual funds whose managers simultaneously manage portfolios with performance-based incentive fees for three account types: mutual funds, hedge funds, and separate accounts. Importantly, our dataset is free of selection bias because it is hand collected from mandatory SEC filings. We find that only funds whose managers also manage hedge funds significantly underperform peer mutual funds. Moreover, underperformance begins only after fund managers begin to manage a hedge fund. We find that managerial incentives and opportunities for cross-subsidization explain variation in underperformance across funds, supporting the conflicts of interest hypothesis in the debate on “side-by-side management.”

Keywords: side-by-side management, conflicts of interest, mutual fund performance, favoritism, hedge funds

JEL Classification: G10, G14, G20, G23

Suggested Citation

Del Guercio, Diane and Genc, Egemen and Tran, Hai, Playing Favorites: Conflicts of Interest in Mutual Fund Management (March 23, 2017). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2774273

Diane Del Guercio (Contact Author)

University of Oregon, Lundquist College of Business ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States
541-346-5179 (Phone)
541-346-3341 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Egemen Genc

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Hai Tran

Loyola Marymount University ( email )

Los Angeles, CA 90045
United States
3103387409 (Phone)

HOME PAGE: http://www.haitranv.com

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