TY - JOUR
T1 - The invisible hand of internal markets in mutual fund families
AU - Goncalves-Pinto, Luis
AU - Sotes-Paladino, Juan
AU - Xu, Jing
N1 - Funding Information:
For helpful comments and discussions, we thank Elias Albagli, Gordon Alexander, David Gallagher, Hugh H. Kim, Alberto Manconi, Filippo Massari, Pedro Matos, Marco Navone, Marcel Rindisbacher, Antonios Sangvinatsos, Giorgo Sertsios, Nico Singer, Chengwei Wang, and Fernando Zapatero. We also appreciate the comments of participants at the Australasian Finance and Banking Conference, the International Conference on Asia-Pacific Financial Markets (CAFM), the FIRN Conference, the FMA Asia Conference, the FIRS Conference, the FMA European Conference, the LBS Annual Trans-Atlantic Doctoral Conference, the Portuguese Finance Network Conference, the World Finance Conference, and seminar participants at Deakin University, Instituto de Empresa, Manchester Business School, Nova School of Business and Economics, Pontificia Universidad Católica de Chile, Universidad de los Andes (Chile) and Vienna Graduate School of Finance. This paper previously circulated under the title “The Value of Cross-Trading to Mutual Fund Families in Illiquid Markets: A Portfolio Choice Approach.” Goncalves-Pinto gratefully acknowledges financial support from Singapore MOE AcRF Tier-1 Grant No. R-315-000-094-133 .
Funding Information:
For helpful comments and discussions, we thank Elias Albagli, Gordon Alexander, David Gallagher, Hugh H. Kim, Alberto Manconi, Filippo Massari, Pedro Matos, Marco Navone, Marcel Rindisbacher, Antonios Sangvinatsos, Giorgo Sertsios, Nico Singer, Chengwei Wang, and Fernando Zapatero. We also appreciate the comments of participants at the Australasian Finance and Banking Conference, the International Conference on Asia-Pacific Financial Markets (CAFM), the FIRN Conference, the FMA Asia Conference, the FIRS Conference, the FMA European Conference, the LBS Annual Trans-Atlantic Doctoral Conference, the Portuguese Finance Network Conference, the World Finance Conference, and seminar participants at Deakin University, Instituto de Empresa, Manchester Business School, Nova School of Business and Economics, Pontificia Universidad Católica de Chile, Universidad de los Andes (Chile) and Vienna Graduate School of Finance. This paper previously circulated under the title “The Value of Cross-Trading to Mutual Fund Families in Illiquid Markets: A Portfolio Choice Approach.” Goncalves-Pinto gratefully acknowledges financial support from Singapore MOE AcRF Tier-1 Grant No. R-315-000-094-133.
Publisher Copyright:
© 2018 Elsevier B.V.
PY - 2018/4
Y1 - 2018/4
N2 - The internal markets of fund families can encourage member funds to deviate excessively from their investment mandates. Theoretically, we show that fund managers following sufficiently different style benchmarks can engage in risk-shifting by trading with one another at low cost inside their family. This benefits the managers and the family even in the absence of a family-level strategy. However, the excessive risks taken by the managers can be costly to fund investors. Empirically, we find support for the positive effect of intra-family style diversity on offsetting trades across funds and on deviations of funds’ portfolios from their benchmarks.
AB - The internal markets of fund families can encourage member funds to deviate excessively from their investment mandates. Theoretically, we show that fund managers following sufficiently different style benchmarks can engage in risk-shifting by trading with one another at low cost inside their family. This benefits the managers and the family even in the absence of a family-level strategy. However, the excessive risks taken by the managers can be costly to fund investors. Empirically, we find support for the positive effect of intra-family style diversity on offsetting trades across funds and on deviations of funds’ portfolios from their benchmarks.
KW - Benchmarking
KW - Cross-trading
KW - Mutual fund families
KW - Stock illiquidity
UR - http://www.scopus.com/inward/record.url?scp=85044631332&partnerID=8YFLogxK
U2 - 10.1016/j.jbankfin.2018.02.001
DO - 10.1016/j.jbankfin.2018.02.001
M3 - Article
AN - SCOPUS:85044631332
SN - 0378-4266
VL - 89
SP - 105
EP - 124
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
ER -