Double Bonus? Implicit Incentives for Money Managers with Explicit Incentives

42 Pages Posted: 6 Jun 2017  

Vincent Gregoire

University of Melbourne - Department of Finance

Juan M. Sotes-Paladino

University of Melbourne - Department of Finance

Date Written: June 2, 2017

Abstract

Using a unique dataset of performance-fee mutual funds, we examine the interaction between direct and indirect incentives in the asset management industry. A comparison of the flow-performance relationships of performance-fee and non-performance-fee funds reveals that funds with direct incentives can face substantially steeper indirect incentives. Among performance-fee funds, the flow relationship depends on the performance fee level and tends to attenuate the asymmetry in total pay for good vs. poor performance. Altogether, our findings suggest that the market favors steep but symmetric ("linear") compensation schedules for asset managers. Our results shed new light on the contracting relation between delegating investors and their portfolio managers.

Keywords: money management, performance fees, fund flows, managerial incentives

JEL Classification: G11, G23

Suggested Citation

Gregoire, Vincent and Sotes-Paladino, Juan M., Double Bonus? Implicit Incentives for Money Managers with Explicit Incentives (June 2, 2017). Available at SSRN: https://ssrn.com/abstract=2980599 or http://dx.doi.org/10.2139/ssrn.2980599

Vincent Gregoire (Contact Author)

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Juan M. Sotes-Paladino

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia
+61 3 9035 9827 (Phone)
+61 3834 6914 (Fax)

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