Should We Expect Skilled Managers to Be Stars? (Dis)Incentive Effects of Fund Flows in Money Management
Juan M. Sotes-Paladino
The University of Melbourne - Department of Finance
February 18, 2014
Convex flow-performance relationships create risk-shifting incentives for mutual fund managers, but also relative-performance concerns. In a dynamic investment model, I show that relative concerns can dominate the behavior of high-skill managers. Higher flow convexity can then result in more conservative (herd) behavior and less-than-attainable performance. As managers' skill advantage over their peers increases, flow incentives can further lead them to exploit this advantage to a lesser extent. I present evidence relating flow incentives to managerial behavior over a sample of U.S. mutual funds. Overall, I provide a novel link between investors' flows and the documented mediocre performance of active funds.
Number of Pages in PDF File: 64
Keywords: portfolio delegation, mutual funds, incomplete information, fund flows, herding, performance evaluation
JEL Classification: C61, C63, D60, D81, D82, D83, G11, G23working papers series
Date posted: August 20, 2012 ; Last revised: February 19, 2014
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