Long-Run Investment Management Fee Incentives and Discriminating between Talented and Untalented Managers
“Long-Run Investment Management Fee Incentives and Discriminating Between Talented and Untalented Managers”, Journal of Investment Management, 2003, v1(4), 1-26.
26 Pages Posted: 25 Feb 2016 Last revised: 26 Apr 2016
Date Written: January 1, 2003
Ferguson and Leistikow [(1997). Journal of Financial Engineering 6, 1–30] (FLa) was the first long-run risk-neutral analysis of the performance volatility incentives created by investment management fee structures. This paper extends FLa in six ways. It allows the portfolio’s value to change, incorporates expected investment performance, and addresses expenses and distributions. It also shows the impact of paying investment management performance fees from the portfolio, and determines if the contract renewal structure and fee arrangements discriminate effectively among talented and untalented managers. Finally, it introduces a volatility-dependent contract renewal structure that provides good discrimination and strongly motivates manager behavior consistent with client preferences.
Keywords: Investment Management Fee Incentives, Investment Management, Investment Performance Measurement, active management
JEL Classification: G10, G11, G12, G14
Suggested Citation: Suggested Citation