Leaving the (fund) gate ajar: investor protection or marketing ploy?

Abstract

Using a sample of equity funds in China, we explore for the first time mutual funds that impose discretionary inflow restrictions (gates) on investors. Contrary to managers’ claim, we find no clear evidence that inflow gates protect investor interests. Despite their superior past performance, inflow-restricted funds’ subsequent returns decline dramatically. In addition, funds tilt toward a riskier investment strategy and deliver a negative risk-adjusted return when the gate is in place. Our analyses further reveal that, after announcing purchase limits on fund assets, funds attract extra flows and more retail investors. This is consistent with the scarcity principle in marketing. Overall, we suggest that leaving the fund gate ajar to investors appears to be more of a marketing ploy than a form of investor protection.