Firms’ competitive advantages are unsustainable when competitors hire their employees away to study and recreate those advantages. We document inter-firm knowledge spillovers through labor mobility in the mutual fund industry, which result in performance improvement at the recipient family. This effect intensifies when frictions hampering knowledge absorption at the recipient family are weaker and switching managers had better access to the organization processes at the originating family. Performance deterioration at the originating family, which intensifies when more money chases the newly-transferred knowledge, suggests erosion of its competitive advantage and wealth transfers across investors in the respective families.

This study examines how the efficiency of trading desks operated by mutual fund families affects portfolio performance and investment behavior of affiliated funds. We estimate the trading efficiency of a fund family's trading desk as the difference between the gross return of the family's index fund, which incorporates trading costs, and the return of the underlying index, which does not incorporate trading costs, around index adjustment dates. By operating more efficient trading desks that help reduce trading costs, fund families improve the performance of their funds significantly and also enable their funds to trade more and hold less liquid portfolios.