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Affiliation and Delegated Portfolios

Paper Session

Friday, Jan. 6, 2017 1:00 PM – 3:00 PM

Sheraton Grand Chicago, Chicago Ballroom IX
Hosted By: American Finance Association
  • Chair: Veronika Pool, Indiana University

Asset Management Within Commercial Banking Groups: International Evidence

Miguel Ferreira
,
Nova University of Lisbon
Pedro Matos
,
University of Virginia
Pedro Pires
,
Nova University of Lisbon

Abstract

We study the performance of equity mutual funds run by asset management divisions of commercial banking groups using a worldwide sample. We show that bank-affiliated funds underperform unaffiliated funds by 70 basis points per year. Consistent with conflicts of interest, the underperformance of affiliated funds is more pronounced among funds with larger stock holdings of the bank’s lending clients. Divestitures of asset management divisions by banking groups and placebo tests using passive and international funds support a causal interpretation of the results. Our findings suggest that affiliated funds support their lending divisions’ operations at the expense of fund investors.

Financial Conglomerate Affiliation and Hedge Funds’ Countercyclical Risk Taking

Francesco Franzoni
,
University of Lugano and Swiss Finance Institute
Mariassunta Giannetti
,
Stockholm School of Economics

Abstract

We show that financial-conglomerate-affiliated hedge funds (FCAHFs) have more stable funding and lower flow-performance sensitivity than other funds even though they are less likely to impose impediments on withdrawals. Arguably due to their privileged access to funding, during periods of financial turmoil, FCAHFs are able to take more risk and to purchase less liquid and more volatile stocks than other hedge funds. During good times, instead, FCAHFs expand their assets less than other funds and are less exposed to systematic risk factors. Thus, FCAHFs appear to perform a stabilizing function for the financial system even though they do not generate higher returns for their investors.

Interfund lending in mutual fund families: Role in liquidity management

Vikas Agarwal
,
Georgia State University
Haibei Zhao
,
Lehigh University

Abstract

Although the 1940 Act restricts interfund lending within a mutual fund family, families can apply for regulatory exemptions to participate in interfund 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 interfund lending. We document several costs and benefits of interfund 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.
Discussant(s)
Lauren Cohen
,
Harvard Business School
Wei Jiang
,
Columbia University
Scott Yonker
,
Cornell University
JEL Classifications
  • G1 - Asset Markets and Pricing