Capital Commitment and Performance: The Role of Mutual Fund Charges
forthcoming at the Journal of Financial and Quantitative Analysis
44 Pages Posted: 6 Apr 2019 Last revised: 28 Nov 2022
Date Written: March 13, 2020
We study how the scarcity of committed capital affects the equilibrium distribution of net alphas in the mutual fund industry. We propose a model of active portfolio management with different sales fee structures where committed capital is in short supply. Under this assumption, a portfolio's net excess return is not fully appropriated by the fund but shared with long-term investors. Empirically, we show that committed capital allows funds to hold shares longer, invest in more illiquid stocks, and take advantage of slow-moving arbitrage opportunities. Consistent with the model, funds with a higher proportion of committed capital generate higher value added.
Keywords: Mutual fund, investment horizon, fee structure, capital commitment, load shares
JEL Classification: G11, G23, J33, J44, L22, L25, L84, M12, M52
Suggested Citation: Suggested Citation