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Investor Cash Flow and Mutual Fund Behavior

Xiangbo Liu, Zijun Liu, Zhigang Qiu

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Abstract

We study the behavior of a mutual fund manager in a discrete‐time model, in which new investors may choose to invest in the fund after the fund manager has made trading decisions. We show that under certain conditions the fund manager may choose to buy overvalued assets at the expense of the investors in order to attract new investments, who would otherwise not invest in the fund. This can potentially lead to higher risky asset prices and a higher‐than‐optimal proportion of investment in risky assets in the active fund management industry.

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What this paper is about

We study the behavior of a mutual fund manager in a discrete‐time model, in which new investors may choose to invest in the fund after the fund manager has made trading decisions. We show that under certain conditions the fund manager may choose to buy overvalued assets at the expense of the investors in order to attract new investments, who would otherwise not invest in the fund. This can potentially lead to higher risky asset prices and a higher‐than‐optimal proportion of investment in risky assets in the active fund management industry.

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OpenAlex reports 2 citations for this work. Citation counts describe recorded attention and do not establish research quality.

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Available abstract

We study the behavior of a mutual fund manager in a discrete‐time model, in which new investors may choose to invest in the fund after the fund manager has made trading decisions. We show that under certain conditions the fund manager may choose to buy overvalued assets at the expense of the investors in order to attract new investments, who would otherwise not invest in the fund. This can potentially lead to higher risky asset prices and a higher‐than‐optimal proportion of investment in risky assets in the active fund management industry.

Key concepts: Manager of managers fund, Closed-end fund, Fund administration, Mutual fund, Open-end fund, Target date fund, Income fund, Finance

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