Entrepreneurial Mutual Fund Managers

I study how mutual funds invest in public U.S. firms where founding family members retain a significant portion of shares. I posit that informed funds exploit the opaque nature of family firms by holding large positions when they have good private signals about the firms. By studying actively managed U.S. equity mutual funds from 2001 to 2010, I show that more cautious funds (e.g., funds affiliated with larger fund families, funds affiliated with a commercial lending conglomerate, and funds offering an institutional class) invest less in family firms than conventional funds. Consistent with the informed trading hypothesis, I find a positive relation between funds' holdings of family firms and subsequent fund performance, which mainly arises from superior returns of their family firm positions. Entrepreneurial mutual funds -- funds in the top decile of family firm holdings within each fund category -- outperform other funds by 0.82 (0.77) percentage points per year in terms of Carhart's four-factor alpha (liquidity-adjusted five-factor alpha). The fund outperformance becomes more pronounced when they hold family firms with higher information asymmetry. Trades by "informed funds" strongly predict future stock returns of family firms. The information advantage of entrepreneurial funds substantially declined after the Sarbanes-Oxley Act