Incentives and Mutual Fund Performance: Higher Performance or Just Higher Risk Taking?

Posted: 13 Apr 2009

Multiple version iconThere are 2 versions of this paper

Date Written: May 2009

Abstract

We study the impact of contractual incentives on the performance of mutual funds. We find that high-incentive contracts induce managers to take more risk and reduce the funds’ probability of survival. Yet, funds with high-incentive contracts deliver higher risk-adjusted return, and the superior performance remains persistent. The top incentive quintile of funds outperforms the bottom quintile by 2.70% per year. Moreover, high-incentive winner funds from one year have a positive alpha of 0.41% per month in the following year. Focusing on funds’ holdings, we show that active portfolio rebalancing is the main channel through which incentives increase performance.

Keywords: G23, G30, G32

Suggested Citation

Massa, Massimo and Patgiri, Rajdeep, Incentives and Mutual Fund Performance: Higher Performance or Just Higher Risk Taking? (May 2009). The Review of Financial Studies, Vol. 22, Issue 5, pp. 1777-1815, 2009. Available at SSRN: https://ssrn.com/abstract=1376201 or http://dx.doi.org/hhn023

Massimo Massa (Contact Author)

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

Rajdeep Patgiri

BlackRock, Inc ( email )

Drapers Gardens
12 Throgmorton Avenue
London, EC2N 2DL
United Kingdom
+44 20 7743 1524 (Phone)

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