Abstract:
The simultaneous management of multiple mutual funds creates distortions in delegated portfolio management misaligned with the interests of investors and regulators. Multi-fund managers cross subsidize their top performing funds at the expense of low performing funds. I proxy for cross fund subsidization by measuring the degree in which a fund manager engages in cross trading or opposite trading with other funds that he/she manages simultaneously during each quarter in the sample. Opposite trading exhibits a strong positive relationship with abnormal returns for a multi-manager's high return funds and a strong negative relationship with abnormal returns for a multi-manager's low return funds.  Moreover, multi-fund managers promote high year-to-date return funds without sacrificing the performance of low year-to-date funds.  An analysis of opposite trading behavior between single-fund managers is
inconsistent with cross-fund subsidization, calling attention to potential breaches of fiduciary duty emanating from multi-fund management.