Although the 1940 Act restricts inter-fund lending within a mutual fund family, families can apply for regulatory exemptions to participate in inter-fund lending. We find that heterogeneity in portfolio liquidity and investor flows across funds, funds’ investment restrictions, and governance mechanisms influence the fund family’s decision to apply for inter-fund lending. We document several costs and benefits of inter-fund lending. Costs include lower sensitivity of managers’ turnover to past performance and greater investor withdrawal for poorly governed funds. Benefits include funds being able to hold more illiquid and concentrated portfolios, and being less susceptible to runs.
Paper:
Inter-fund Lending In Mutual Fund Families
