Time-Varying Incentives in the Mutual Fund Industry

42 Pages Posted: 14 Oct 2008 Last revised: 14 Mar 2013

See all articles by Jacques Olivier

Jacques Olivier

HEC Paris - Finance Department; Centre for Economic Policy Research (CEPR)

Anthony S. Tay

Singapore Management University - School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: April 1, 2008

Abstract

This paper re-examines the incentives of mutual fund managers arising from investor flows. We provide evidence that the convexity of the flow-performance relationship varies with economic activity. We show that the effect is economically large and is driven neither by abnormal years nor by outliers. We test two possible channels through which this pattern may arise. We investigate implications of the time-varying convexity for the incentives of managers to alter strategically the risk of their portfolios. We provide evidence supporting a 'conditional' tournament hypothesis: poor mid-year performers increase the risk of the portfolio only when economic activity is strong. Finally, we briefly discuss some methodological implications.

Keywords: Mutual funds, Incentives, Flow-Performance Relationship, Convexity, Business Cycles

Suggested Citation

Olivier, Jacques and Tay, Anthony S., Time-Varying Incentives in the Mutual Fund Industry (April 1, 2008). Paris December 2008 Finance International Meeting AFFI - EUROFIDAI Paper. Available at SSRN: https://ssrn.com/abstract=1282075 or http://dx.doi.org/10.2139/ssrn.1282075

Jacques Olivier (Contact Author)

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France
+33 1 3967 7297 (Phone)
+33 1 3967 7085 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Anthony S. Tay

Singapore Management University - School of Economics ( email )

90 Stamford Road
178903
Singapore

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