Playing Favorites: Conflicts of Interest in Mutual Fund Management
53 Pages Posted: 4 May 2016 Last revised: 10 Jun 2017
Date Written: March 23, 2017
Abstract
We examine the performance of mutual funds whose managers simultaneously manage portfolios with performance-based incentive fees for three account types: mutual funds, hedge funds, and separate accounts. Importantly, our dataset is free of selection bias because it is hand collected from mandatory SEC filings. We find that only funds whose managers also manage hedge funds significantly underperform peer mutual funds. Moreover, underperformance begins only after fund managers begin to manage a hedge fund. We find that managerial incentives and opportunities for cross-subsidization explain variation in underperformance across funds, supporting the conflicts of interest hypothesis in the debate on “side-by-side management.”
Keywords: side-by-side management, conflicts of interest, mutual fund performance, favoritism, hedge funds
JEL Classification: G10, G14, G20, G23
Suggested Citation: Suggested Citation