Double Bonus? Implicit Incentives for Money Managers with Explicit Incentives
42 Pages Posted: 6 Jun 2017
Date Written: June 2, 2017
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: Suggested Citation