Outsourced Fund and Risk-taking: A Tale of Two Contracts

44 Pages Posted: 6 Apr 2022 Last revised: 9 May 2022

See all articles by Jung Hoon Lee

Jung Hoon Lee

Vanderbilt University - Finance

Saurin Patel

Ivey Business School, Western University

Shyam Venkatesan

Ivey Business School, Western University

Date Written: May 8, 2022

Abstract

We investigate the effects of contractual arrangements on the portfolio risk choice of outsourced mutual funds. Outsourced funds display two times more strategic risk-shifting than in-house managed funds. After instrumenting for a fund's outsourcing status, we further establish a causal relationship between outsourcing and strategic risk-shifting. Our evidence shows this behavior to be more consistent with a motive to manage the risk of contract termination and less with the motive to exploit the optionality in portfolio manager contracts. Fund families can employ additional mechanisms to mitigate the intrinsic risk-shifting behavior of the outsourced managers.

Keywords: Mutual fund, Outsourcing, Risk-shifting, Contracts

JEL Classification: G11, G20, G23

Suggested Citation

Lee, Jung Hoon and Patel, Saurin and Venkatesan, Shyam Sunder, Outsourced Fund and Risk-taking: A Tale of Two Contracts (May 8, 2022). Available at SSRN: https://ssrn.com/abstract=4060504 or http://dx.doi.org/10.2139/ssrn.4060504

Jung Hoon Lee (Contact Author)

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States
8123603309 (Phone)

Saurin Patel

Ivey Business School, Western University ( email )

1255 Western Road
Room 2303
London, Ontario N6G 0N1
Canada
519-661-4195 (Phone)

Shyam Sunder Venkatesan

Ivey Business School, Western University ( email )

1151 Richmond St
London, Ontario N6A 3K7
Canada

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