Heads We Win, Tails You Lose. Why Don't More Fund Managers Offer Symmetric Performance Fees?

55 Pages Posted: 17 Nov 2014

See all articles by Andrew Clare

Andrew Clare

City University London - Sir John Cass Business School

Nick Motson

City University London - Sir John Cass Business School

Richard Payne

City University London - Sir John Cass Business School

Steve Thomas

City University London - Sir John Cass Business School

Date Written: October 31, 2014

Abstract

In this paper we use Monte Carlo simulation techniques to gauge the impact of three mutual fund fee structures on the utility of investors and fund managers: a fee fixed as a proportion of AUM; an asymmetric performance-based fee; and a symmetric performance-based fee. Our study identifies a clear 'incentive mismatch' between the best interests of investors and managers, more specifically, there is no single structure that simultaneously maximises both the investors’ and the managers’ utility. In fact, the results show that the most prevalent fee structure currently in the UK market (a fixed fee as a proportion of AUM) is generally the best structure for the manager and the worst for the investor! To verify the robustness of our results, we stress-test the model parameters, however, none of these model variations change the base results and our main conclusion. The results in this paper give rise to a natural question: "Since investors would prefer symmetric performance-based fees, why don't more fund managers offer such fees?"

Suggested Citation

Clare, Andrew D. and Motson, Nicholas E. and Payne, Richard G. and Thomas, Stephen H., Heads We Win, Tails You Lose. Why Don't More Fund Managers Offer Symmetric Performance Fees? (October 31, 2014). Available at SSRN: https://ssrn.com/abstract=2525545 or http://dx.doi.org/10.2139/ssrn.2525545

Andrew D. Clare (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Nicholas E. Motson

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 (0) 20 7040 4074 (Phone)
+44 (0) 20 7040 8881 (Fax)

Richard G. Payne

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Stephen H. Thomas

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 (0) 20 7040 5271 (Phone)
+44 (0) 20 7040 8881 (Fax)

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