On the Regulation of Fee Structures in Mutual Funds

42 Pages Posted: 20 Jul 2000 Last revised: 10 Oct 2010

See all articles by Sanjiv Ranjan Das

Sanjiv Ranjan Das

Santa Clara University - Leavey School of Business

Rangarajan K. Sundaram

New York University (NYU) - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: July 1998

Abstract

We offer an alternative framework for the analysis of mutual funds and use it to examine the rationale behind existing regulations that require mutual fund advisor fees to be of the fulcrum' variety. We find little justification for the regulations. Indeed, we find that asymmetric incentive fees' in which the advisor receives a flat fee plus a bonus for exceeding a benchmark index provide Pareto-dominant outcomes with a lower level of equilibrium volatility. Our model also offers some insight into fee structures actually in use in the asset-management industry. We find that when leveraging is not permitted and the fee structure must be of the fulcrum variety, the equilibrium fee in our model is a flat fee with no performance component; if asymmetric incentive fees are allowed and leveraging is permitted the equilibrium fee is an incentive fee with a large performance component. These predictions match observed fee structures in the mutual fund industry and the hedge fund industry, respectively.

Suggested Citation

Das, Sanjiv Ranjan and Sundaram, Rangarajan K., On the Regulation of Fee Structures in Mutual Funds (July 1998). NBER Working Paper No. w6639. Available at SSRN: https://ssrn.com/abstract=226349

Sanjiv Ranjan Das (Contact Author)

Santa Clara University - Leavey School of Business ( email )

Department of Finance
316M Lucas Hall
Santa Clara, CA 95053
United States

HOME PAGE: http://algo.scu.edu/~sanjivdas/

Rangarajan K. Sundaram

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0308 (Phone)
212-995-4233 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
59
Abstract Views
1,494
rank
35,510
PlumX Metrics