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Interfund Lending in Mutual Fund Families: Role in Liquidity Management

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  • Vikas Agarwal
  • Haibei Zhao

Abstract

The Investment Company Act of 1940 restricts interfund lending and borrowing within a mutual fund family, but families can apply for regulatory exemptions to participate in such transactions. We find that the monitoring mechanisms and investment restrictions influence the family’s decision to apply for the interfund lending programs. We document several benefits of such programs for equity funds. First, participating funds reduce cash holdings and increase investments in illiquid assets. Second, fund investors exhibit less run-like behavior. Third, it helps mitigate asset fire sales after extreme investor redemptions. Offsetting these benefits, money market funds in participating families experience investor outflows.Received May 26, 2018; editorial decision November 27, 2018 by Editor Itay Goldstein. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Vikas Agarwal & Haibei Zhao, 2019. "Interfund Lending in Mutual Fund Families: Role in Liquidity Management," The Review of Financial Studies, Society for Financial Studies, vol. 32(10), pages 4079-4115.
    • Handle: RePEc:oup:rfinst:v:32:y:2019:i:10:p:4079-4115.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhz002
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    Cited by:

    1. Abbas Hejri, 2022. "On the recent developments of mutual funds with fixed‐income holdings: a systematic review," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(2), pages 2313-2338, June.
    2. Chernenko, Sergey & Sunderam, Adi, 2020. "Do fire sales create externalities?," Journal of Financial Economics, Elsevier, vol. 135(3), pages 602-628.
    3. Agarwal, Vikas & Ren, Honglin & Shen, Ke & Zhao, Haibei, 2021. "Redemption in kind and mutual fund liquidity management," CFR Working Papers 21-11, University of Cologne, Centre for Financial Research (CFR).
    4. Wang, Z. Jay & Yang, Jingyun, 2021. "Cross-trading and liquidity management: Evidence from municipal bond funds," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    5. Kräussl, Roman & Rinne, Kalle & Sunc, Huizhu, 2023. "Does family matter? Venture capital cross-fund cash flows," CFS Working Paper Series 695, Center for Financial Studies (CFS).
    6. Dasgupta, Amil & Choi, Jaewon & Oh, Ji Yeol Jimmy, 2019. "Bond Funds and Credit Risk," CEPR Discussion Papers 14134, C.E.P.R. Discussion Papers.
    7. Aragon, George O. & Kim, Min S., 2023. "Fire sale risk and expected stock returns," Journal of Financial Economics, Elsevier, vol. 149(3), pages 578-609.
    8. Li, Li & Huang, Shiyang & Lou, Dong & Shi, Jiahong, 2021. "Why don't most mutual funds short sell?," LSE Research Online Documents on Economics 118854, London School of Economics and Political Science, LSE Library.
    9. Choi, Jaewon & Dasgupta, Amil & Oh, Ji, 2022. "Bond funds and credit risk," LSE Research Online Documents on Economics 118856, London School of Economics and Political Science, LSE Library.

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