Predation versus Cooperation in Mutual Fund Families

In this paper we investigate how mutual funds react to the distress of another fund in the same fund family. We test three alternative hypotheses: (1) funds help the distressed fund, (2) funds front-run the distressed fund improving their relative performance in the fund family and, (3) the family coordinates and benefits from front-running the distressed fund. Our results suggest that fund managers front-run their distressed siblings and that this is the outcome of a coordinated strategy. As a consequence, funds in the same family exhibit abnormal returns, while the distressed fund pays a higher cost of distress. ∗Eisele is at University of Lugano. Nefedova and Parise are at University of Lugano and Swiss Finance Institute. We are particularly grateful to Francesco Franzoni and Harald Hau for insightful suggestions and comments. We thank Rüdiger Fahlenbrach, Daniele Del Monte and participants of the Lugano Corporate Finance workshop, the Gerzensee doctoral seminar and the Geneva conference in Liquidity and Arbitrage Trading for helpful comments. We acknowledge financial support from SFI, Finrisk and USI. Contact at: [email protected]; [email protected]; [email protected]