Are Star Funds Really Shining? Cross-Trading and Performance Shifting in Mutual Fund Families

59 Pages Posted: 30 Aug 2016

See all articles by Alexander Eisele

Alexander Eisele

University of Lugano

Tamara Nefedova

Université Paris-Dauphine

Gianpaolo Parise

EDHEC Business School

Multiple version iconThere are 2 versions of this paper

Date Written: August 2016


The majority of financial trades take place in open and highly regulated markets. As an alternative venue, large asset managers sometimes offset the trades of affiliated funds in an internal market, without relying on external facilities or supervision. In this paper, we employ institutional trade-level data to examine such cross-trades. We find that cross-trades used to display a spread of 46 basis points with respect to open market trades before more restrictive regulation was adopted. The introduction of tighter supervision decreased this spread by 59 basis points, bringing the execution price of cross-trades below that of open market trades. We additionally find that cross-trades presented larger deviations from benchmark prices when the exchanged stocks were illiquid and highly volatile, during high financial uncertainty times, and when the asset manager had weak governance, large internal markets, and a strong incentive for reallocating performance. Finally, we provide evidence suggesting that cross-trades are more likely than open-market trades to be executed exactly at the highest or lowest price of the day, consistent with the ex post setting of the price. Our results are consistent with theoretical models of internal capital markets in which the headquarters actively favors its "stars" at the expense of the least valuable units.

Keywords: mutual funds, cross-trading, performance shifting, conflict of interests

JEL Classification: G11, G14, G23

Suggested Citation

Eisele, Alexander and Nefedova, Tamara and Parise, Gianpaolo, Are Star Funds Really Shining? Cross-Trading and Performance Shifting in Mutual Fund Families (August 2016). BIS Working Paper No. 577. Available at SSRN:

Alexander Eisele (Contact Author)

University of Lugano ( email )

Via Giuseppe Buffi 13
Lugano, TN Ticino 6900

Tamara Nefedova

Université Paris-Dauphine ( email )

Place du Maréchal de Tassigny
Paris, Cedex 16 75775


Gianpaolo Parise

EDHEC Business School ( email )

393 Promenade des Anglais
Nice, 06200

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