Abstract
Using a sample of active 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 compelling evidence that inflow gates serve to protect investor interests. Despite their superior past performance, inflow-restricted funds exhibit a significant decline in subsequent returns. In addition, funds tilt toward a riskier investment strategy when a gate is in place. Our analyses reveal that partly-closed gates further exacerbate investors' chasing of past returns, attracting extra flows and locking in more retail investors. 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. Our findings carry important implications for mutual fund investors, asset managers, and policy makers alike.
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