Portfolio Manager Ownership and Mutual Fund Risk Taking

Abstract

This paper studies the effect of portfolio manager ownership (i.e., skin in the game) on mutual fund risk taking. Using holdings-based risk change measures that capture managers’ ex ante risk choices, we find that portfolio manager ownership reduces both intra-year and across-year risk-taking activities. The relation between ownership and risk reduction is particularly strong among managers with high agency-issue-induced risk-taking incentives, e.g., managers who face a more convex flow-performance relation, have poor past performance, or are not compensated based on long-term fund performance. Funds with greater managerial ownership are also associated with lower levels of total risk and downside risk. Overall, portfolio manager ownership serves as an incentive alignment mechanism and has important implications for mutual fund investors.

Keywords: Mutual funds, portfolio manager ownership, agency issues, risk taking, managerial incentives

JEL Classification: G23, G29, G32