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The paradox of closing mutual funds to new investors

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  • Svetoslav Covachev

Abstract

I provide an explanation for the well-established paradox that mutual funds that close to new investors fail to maintain their pre-closure positive abnormal performance after closing. Using a large sample of active US equity mutual funds, I find that the within-style performance ranks of closed funds revert to the mean as strongly as those of a control group of open funds. Furthermore, I show that funds that are closed do not drastically alter their investment allocations and hold portfolios that are indistinguishable from their portfolios prior to closing in terms of risk-adjusted performance. Therefore, mean reverting stock returns explain the deterioration in fund performance after closing to new investors. I also document that funds are not capable of better preserving their assets when anticipating a decline in performance by closing to new investors and thus adding exclusivity. Furthermore, the control group of open funds does not suffer from excessive flows. Closing to new investors is at best unnecessary from the stand-alone perspective of the fund.

Suggested Citation

  • Svetoslav Covachev, 2023. "The paradox of closing mutual funds to new investors," PLOS ONE, Public Library of Science, vol. 18(9), pages 1-24, September.
    • Handle: RePEc:plo:pone00:0290254
    DOI: 10.1371/journal.pone.0290254
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    References listed on IDEAS

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