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Co-Insurance in Mutual Fund Families

Breno Schmidt, Goizueta Business School, Emory University Atlanta

4th May 2012  11:30 am - 12:30 pm Room 214/215, H69 - Economics and Business Building

We apply a bootstrap approach to show that mutual fund families coordinate actions across member funds in order to support those that are forced to sell due to heavy outflows. We show how such strategy can affect the pricing implications of asset fire sales and how it distorts the incentives of fund managers. First, we show that coordination is more likely to be observed within families that have a sufficiently large number of funds. Consistent with internal coordination, we document weak or no price pressure coming from the widespread selling by financially distressed mutual funds that are affiliated with large families, while the effect is very strong for their small-family peers. Moreover, we show that affiliation with large families significantly reduces the sensitivity of outflows to poor past performance, in particular for funds holding more illiquid portfolios. However, by improving the convexity of their implicit payoff structures, we show that risk-sharing strategies at the family level can encourage individual fund managers to take extra risks.