A new study has concluded that mutual fund families often play favorites with their funds. They do this, it says, by giving certain funds extra shares of the most-sought-after initial public offerings and by arranging for funds in a family to take the opposite sides of certain trades, to the advantage of a chosen few of those funds.
The study, "Favoritism in Mutual Fund Families? Evidence on Strategic Cross-Fund Subsidization," was conducted by two finance professors at French business schools, Jose-Miguel Gaspar of Essec and Massimo Massa of Insead, with one of Massa's graduate students, Pedro Matos.
The research used a database of all actively managed domestic equity funds in the US from January 1991 through June 2001 and focused on the 50 largest fund families, whose combined assets amount to more than 80 percent of assets in such funds.
The researchers found that, because of favoritism, some funds do better than they would otherwise, while others perform worse. These conclusions are based on a statistical study of fund families as a group.
The researchers found that executives of fund families used several approaches to favor certain funds. In one strategy, the highest-fee funds in a fund family, on average, received far more shares of initial public offerings than those with the lowest fees. And funds with the best year-to-date performances also received a disproportionately large share.
This pattern was even more pronounced for IPOs whose prices jumped the most on their first day of trading. These were presumably the IPOs for which market demand was greatest, and therefore could be most expected to increase the favored funds' returns.
The researchers attributed an even bigger impact to a practice known as opposite trading, which occurs when funds within a family take the opposite sides of trades. That can happen when the manager of a favored fund wishes to buy or sell an illiquid stock, Massa said. The manager might otherwise think twice before making these trades, because the fund's own buying or selling could hurt prices. But by having other funds in the family buy when favored funds are selling or sell when the favorites are buying, the manager of a favored fund can trade with minimal impact on prices.
Over the period studied, the stocks sold by favored funds generally lagged behind the market after they were sold, and the stocks they bought generally outperformed. As a result, opposite trading had the effect of transferring some of the returns of out-of-favor funds to their favored brethren.
HONG KONG SECURITY: The president blasted regulations requiring Taiwanese agents or political organizations to provide information on their Hong Kong-related activities President Tsai Ing-wen (蔡英文) yesterday warned of countermeasures should controversial Chinese national security legislation imposed on Hong Kong undermine or harm Taiwanese interests. Article 43 of the legislation empowers the Hong Kong Special Administrative Region to serve written notices to Taiwanese political organizations or individual agents to furnish information on their Hong Kong-related activities, including their personal particulars, finances, assets, expenditure and capital in the territory. Failure to comply or providing false or incomplete information can result in a fine of HK$100,000 (US$12,903) or imprisonment of six months or two years respectively. Tsai said that Taiwan would keep a close watch on how
FORCED LABOR: Customs officials have seized a 11.8 tonne shipment of products made from human hair on suspicion they were produced by people facing human rights abuses Federal authorities in New York City on Wednesday seized a shipment of weaves and other beauty accessories suspected to be made out of human hair taken from people locked inside a Chinese internment camp. US Customs and Border Protection (CPB) officials said that 11.8 tonnes of hair products worth an estimated US$800,000 were in the shipment. “The production of these goods constitutes a very serious human rights violation, and the detention order is intended to send a clear and direct message to all entities seeking to do business with the United States that illicit and inhumane practices will not be tolerated in
JUST QUESTIONS: Expelled reporter Ai Kezhu said that every member of Southeast Television had complied with the law and had not appeared on any talk shows Two Chinese reporters yesterday left Taiwan after the government revoked their accreditation and ordered them to leave amid a probe into allegations that several Chinese media outlets have set up studios and produced political talk shows in Taiwan. The two reporters — Ai Kezhu (艾珂竹) and Lu Qiang (盧薔) — worked for Fujian Province-based Southeast Television and arrived in Taiwan in December last year. The Mainland Affairs Council has launched an investigation after local media reported that Chinese broadcasters — including China Central Television, Southeast Television and FJTV — had set up studios in Taipei and produced political talk shows. Council Deputy Minister
PROBE LAUNCHED: An officer who served as a supervisor in the drill died in an apparent suicide after the accident, which was caused by unexpected waves Two marines who were on Friday injured in a military exercise in the waters off Kaohsiung passed away yesterday, Navy Command said. The marines — surnamed Tsai (蔡), 26, and a sergeant surnamed Chen (陳), 36 — were in a seven-member Marine Corps team that encountered rough seas during a simulated response to enemy forces landing on Taiwan. Their rubber craft overturned in waters off Taoziyuan (桃子園) beach in Zuoying District (左營), injuring four of the marines. They were rushed to hospital, where three of them — Tsai, Chen and a 34-year-old sergeant — were taken to an intensive care unit