Does cross-border investment improve mutual fund performance? Evidence from China

In this paper, we analyze how Chinese mutual funds' performance is affected by cross-border investments, following the relaxation of investment restrictions on Hong Kong stocks. We find that mutual funds underperform when they increase their H-share holdings, suggesting that easing investment restrictions doesn't improve fund performance. Information asymmetry and the limited ability of fund managers to access H-share information are key factors behind poor performance. And fund managers employ such “bad” strategy to cater to investor preferences. Furthermore, fund managers do not recognize their limitations in investing H-share. We hope our findings give insights into the investment behavior of funds and enhance the development of the Chinese asset management industry.