Closing and Cloning in Mutual Funds

38 Pages Posted: 26 Feb 2007 Last revised: 6 Sep 2015

See all articles by Hsiu-Lang Chen

Hsiu-Lang Chen

University of Illinois at Chicago - Department of Finance

Sheldon Gao

AllianceBernstein

Xiaoqing Hu

University of Illinois at Chicago - Department of Finance

Date Written: August 6, 2007

Abstract

We investigate mutual funds' decision to shut out new investors. We first document that only those closed funds that do not subsequently launch new funds can continuously deliver significantly positive objective- and size-adjusted returns up to six months after the closure. This suggests the existence of optimal fund scale. However, in spite of the potential diseconomies of scale, a non-trivial proportion of closed funds subsequently clone new funds in the same investment objective. One potential explanation for this finding is that closed funds use closures to stand out from the crowd in a highly competitive industry. When managers of closed funds clone new sibling funds, they receive greater public attention and thus can attract more fund flows and/or charge higher fees. We find that the average median-adjusted expense ratios of cloned funds are 12 basis points higher than the corresponding closed funds in the same investment objective. Furthermore, closed fund managers can attract more fund flows to their new sibling funds, making the closure an effective non-performance-based mechanism to extract more economic rents. In addition, we find that fund managers do not implement different strategies before and after a closure. Overall, we find that closing and cloning is an attractive strategy for smaller funds, funds that seek to increase their management fees, and funds with more junior managers in place.

Keywords: Mutual Funds

JEL Classification: G1, G2

Suggested Citation

Chen, Hsiulang and Gao, Sheldon and Hu, Xiaoqing, Closing and Cloning in Mutual Funds (August 6, 2007). Journal of Banking and Finance, Vol. 36, 2012; EFA 2007 Ljubljana Meetings Paper. Available at SSRN: https://ssrn.com/abstract=965461 or http://dx.doi.org/10.2139/ssrn.965461

Hsiulang Chen (Contact Author)

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States
(312) 355-1024 (Phone)

Sheldon Gao

AllianceBernstein ( email )

1345 Avenue of the Americas
New York, NY 10105
United States

Xiaoqing Hu

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
275
Abstract Views
1,843
rank
112,369
PlumX Metrics