Inter-Fund Lending In Mutual Funds: Role Of Internal Capital Markets
Speaker(s) Prof. Vikas Agarwal, Georgia State University

Although the 1940 Act restricts interfund lending (i.e., a fund lending to other funds belonging to the same mutual fund family), fund families can obtain permission from the regulators to set up interfund lending programs. We analyze the determinants and consequences of such programs. We find that heterogeneity in portfolio liquidity and investor flows across funds, investment restrictions placed on funds, and monitoring mechanisms together determine the applications to the program. We document several consequences for funds after they participate in the program. First, funds with better governance perform better. Second, funds reduce their cash holdings, increase their investments in illiquid assets, and hold more concentrated portfolios. Third, investors in participating funds exhibit less run-like behavior.


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