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Conflicting Family Values in Mutual Fund Families



  • JUNG H. LEE,


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    • Bhattacharya and Pool are with Indiana University Kelley School of Business, and Lee is with A. B. Freeman School of Business, Tulane University. For useful comments and discussions, we thank the Editor (Cam Harvey), the Associate Editor, an anonymous referee, Sudheer Chava, Nishant Dass, Nandini Gupta, Cam Harvey, Mike Hemler, Ravi Jagannathan, Sreenivas Kamma, Juhani Linnainmaa, Pedro Matos, Toby Muhlhofer, Vikram Nanda, Vallapuzha Sandhya, Paul Schultz, Amit Seru, Ashish Tiwari, Charles Trzcinka, Jay Wang, Scott Weisbenner, Deniz Yavuz, and Scott Yonker. Seminar comments at Bocconi University, Boston College, Catholic University of Milan, Chicago Booth School of Business, HKUST, Georgia Tech, University of Houston, University of Illinois at Chicago, University of Illinois at Urbana-Champaign, National Taiwan University, University of North Carolina, Northwestern University, Mannheim University, Texas Christian University, University of Venice, the 2010 State of Indiana Conference, the 2011 Spring Meeting of the Q-Group, the 2011 Fidelity Quant Meeting, the 2011 FIRS Conference, and the ICI and AIM Investment Center Conference at the University of Texas at Austin vastly improved the paper.


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.