Fund Competition at the Zero-Fee Bound

35 Pages Posted: 2 Jan 2019 Last revised: 18 Feb 2019

See all articles by Marius Zoican

Marius Zoican

University of Toronto - Finance Area

Date Written: February 15, 2019


Security lending frictions transfer informational rents from short-sellers to asset management funds and investors, who may receive dividends or fee discounts. While state-contingent dividends correlate with shorting demand and provide a natural hedge, fee discounts do not. Ex-ante fee discounts are optimal only if funds can funnel revenues ex-post. Therefore, zero-fee contracts reflect moral hazard. Generally, technology-led drops in fund expenses improve stock market participation. The relationship breaks down for zero-fee opaque funds, as asset managers capture the full returns to technology. To reduce funnelling of lending revenues, costs needs to decrease beyond the point where zero fees become sustainable.

Keywords: asset management, security lending, robo-advisors, moral hazard

JEL Classification: G11, G14, G23

Suggested Citation

Zoican, Marius, Fund Competition at the Zero-Fee Bound (February 15, 2019). Available at SSRN: or

Marius Zoican (Contact Author)

University of Toronto - Finance Area ( email )

105 St George Street
Toronto, Ontario M5S 3E6


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