Law Commons^™

Star Creation: The Manipulation Of Mutual Fund Performance Through Incubation, Ahmed E. Taha, Alan R. Palmiter

Ahmed E Taha

This article reveals how mutual fund companies mislead investors by marketing new funds with artificially high returns. Fund companies create a number of small, new funds (“incubator funds”) that initially operate out of public view. After a period of incubation, the strong performers are actively marketed to the public while the weak performers are quietly terminated. By highlighting the successful incubator funds and hiding the unsuccessful ones, funds companies create the illusion that that the successful funds’ returns were the result of skill rather than luck. In addition, fund companies often subsidize their incubator funds to further artificially boost their …