Paying for Beta: Leverage Demand and Asset Management Fees

62 Pages Posted: 25 Oct 2019 Last revised: 29 Jun 2020

See all articles by Steffen Hitzemann

Steffen Hitzemann

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Stanislav Sokolinski

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Mingzhu Tai

The University of Hong Kong - School of Economics and Finance

Date Written: October 15, 2019

Abstract

We examine how investor demand for leverage shapes asset management fees. In our model, investors' leverage demand generates a cross-section of positive fees even if all managers produce zero risk-adjusted returns. We find support for the model's novel predictions in the sample of the U.S. equity mutual funds: (1) fees increase in fund market beta precisely for beta larger than one; (2) this relation becomes stronger when leverage constraints tighten; and (3) low net alphas are especially common among high-beta funds. These results suggest that asset managers can earn fees above their risk-adjusted returns for providing their investors with leverage.

Keywords: Leverage; Financial Intermediation; Mutual Funds

JEL Classification: G11, G23, L11, L13

Suggested Citation

Hitzemann, Steffen and Sokolinski, Stanislav and Tai, Mingzhu, Paying for Beta: Leverage Demand and Asset Management Fees (October 15, 2019). Available at SSRN: https://ssrn.com/abstract=3470288 or http://dx.doi.org/10.2139/ssrn.3470288

Steffen Hitzemann

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States

Stanislav Sokolinski (Contact Author)

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

111 Washington Avenue
Newark, NJ 07102
United States

Mingzhu Tai

The University of Hong Kong - School of Economics and Finance ( email )

8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong

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