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 data set 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.”

Conflicts of interest, Hedge funds, Mutual funds, Performance-based fees, Side-by-side management
dx.doi.org/10.1016/j.jfineco.2017.04.012, hdl.handle.net/1765/105535
Journal of Financial Economics
Rotterdam School of Management (RSM), Erasmus University

Del Guercio, D. (Diane), Genc, E, & Tran, H. (Hai). (2018). Playing favorites: Conflicts of interest in mutual fund management. Journal of Financial Economics. doi:10.1016/j.jfineco.2017.04.012