Closing and Cloning in Mutual Funds

We investigate mutual funds' decision to shut out new investors. We first document that only those closed funds that do not subsequently launch new funds can continuously deliver significantly positive objective- and size-adjusted returns up to six months after the closure. This suggests the existence of optimal fund scale. However, in spite of the potential diseconomies of scale, a non-trivial proportion of closed funds subsequently clone new funds in the same investment objective. One potential explanation for this finding is that closed funds use closures to stand out from the crowd in a highly competitive industry. When managers of closed funds clone new sibling funds, they receive greater public attention and thus can attract more fund flows and/or charge higher fees. We find that the average median-adjusted expense ratios of cloned funds are 12 basis points higher than the corresponding closed funds in the same investment objective. Furthermore, closed fund managers can attract more fund flows to their new sibling funds, making the closure an effective non-performance-based mechanism to extract more economic rents. In addition, we find that fund managers do not implement different strategies before and after a closure. Overall, we find that closing and cloning is an attractive strategy for smaller funds, funds that seek to increase their management fees, and funds with more junior managers in place