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

See all articles by Juan-Pedro Gomez

Juan-Pedro Gomez

IE Business School - IE University

Melissa Porras Prado

Nova School of Business and Economics; Centre for Economic Policy Research (CEPR)

Rafael Zambrana

University of Notre Dame - Mendoza College of Business

Date Written: March 13, 2020

Abstract

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

Gomez, Juan-Pedro and Porras Prado, Melissa and Zambrana, Rafael, Capital Commitment and Performance: The Role of Mutual Fund Charges (March 13, 2020). forthcoming at the Journal of Financial and Quantitative Analysis, Available at SSRN: https://ssrn.com/abstract=3353344 or http://dx.doi.org/10.2139/ssrn.3353344

Juan-Pedro Gomez

IE Business School - IE University ( email )

Calle Maria de Molina 12
Madrid, Madrid 28006
Spain
+34 917821326 (Phone)

HOME PAGE: http://www.ie.edu/faculty/juan-pedro-gomez/

Melissa Porras Prado (Contact Author)

Nova School of Business and Economics ( email )

Campus de Carcavelos
Rua da Holanda 1
Carcavelos, 2775-405
Portugal

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Rafael Zambrana

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

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