Do Portfolio Manager Contracts Contract Portfolio Management?

60 Pages Posted: 29 Sep 2016 Last revised: 5 Dec 2018

See all articles by Jung Hoon Lee

Jung Hoon Lee

Tulane University - A.B. Freeman School of Business

Charles Trzcinka

Indiana University - Kelley School of Business - Department of Finance

Shyam Venkatesan

Ivey Business School, Western University

Date Written: December 3, 2018

Abstract

Most mutual fund managers have performance-based contracts that are incomplete. We study risk-shifting implications emanating from these contracts. Our theory predicts that mutual fund managers with asymmetric contracts and mid-year performance close to their announced benchmark increase their portfolio risk in the second part of the year. As predicted by our theory, performance deviation from the benchmark decreases risk-shifting only for managers with performance contracts. Deviation from the benchmark dominates other incentives in the literature, suggesting that risk-shifting is motivated more by management contracts than by a tournament to capture flows.

Keywords: Mutual Fund, Risk-Shifting, Incentives, Management Contracts

JEL Classification: G23, M54

Suggested Citation

Lee, Jung Hoon and Trzcinka, Charles and Venkatesan, Shyam Sunder, Do Portfolio Manager Contracts Contract Portfolio Management? (December 3, 2018). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2844962 or http://dx.doi.org/10.2139/ssrn.2844962

Jung Hoon Lee

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Charles Trzcinka (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

Kelley School of Business
1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-9908 (Phone)
812-855-5875 (Fax)

Shyam Sunder Venkatesan

Ivey Business School, Western University ( email )

1151 Richmond St
London, Ontario N6A 3K7
Canada

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