Do Portfolio Manager Contracts Contract Portfolio Management?
60 Pages Posted: 29 Sep 2016 Last revised: 5 Dec 2018
Date Written: December 3, 2018
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: Suggested Citation