What is it about?
We analyze the investment behavior of affiliated funds of mutual funds (AFoMFs), which are mutual funds that can only invest in other funds in the family, and are offered by most large families. Though never mentioned in any prospectus, we discover that AFoMFs provide an insurance pool against temporary liquidity shocks to other funds in the family. We show that, though the family benefits because funds can avoid fire sales, the cost of this insurance is borne by the investors in the AFoMFs. The paper thus uncovers some of the hidden complexities of fiduciary responsibility in mutual fund families.
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Why is it important?
It is illegal for mutual fund families to subsidize their losing funds. This paper is the first to provide strong circumstantial evidence of this illegal practice in the industry. Based on this paper, I volunteered to become a whistleblower for the SEC.
Perspectives
It was fun working with coauthors who taught me everything I now know about the mutual fund industry.
Professor Utpal Bhattacharya
Hong Kong University of Science and Technology
Read the Original
This page is a summary of: Conflicting Family Values in Mutual Fund Families, The Journal of Finance, January 2013, Wiley,
DOI: 10.1111/j.1540-6261.2012.01797.x.
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