It is common for mutual fund managers to concurrently manage assets on behalf of clients outside the mutual fund industry. If these other accounts are more lucrative in terms of current or potential manager compensation, this provides an incentive for managers to favor these other accounts at the expense of mutual fund investors. Using a new dataset hand collected from mandatory SEC filings and therefore free of selection bias, we examine the performance of funds with managers who receive performance-based incentive fees in three different types of accounts: registered investment companies, pooled investment vehicles, and separately managed accounts. We find that only funds with managers who receive incentive fees in pooled investment vehicles (e.g., hedge funds) underperform other peer funds by an economically and statistically significant 9.6 bps per month in Carhart alpha, or 1.15% per year. Further tests using a sample of mutual fund managers who begin to manage a hedge fund during the sample period confirm our prior finding of the negative impact on mutual fund performance. Our evidence provides support for the conflicts of interest hypothesis in the debate on “side-by-side management” of mutual funds and hedge funds.

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