Long-Run Investment Management Fee Incentives and Discriminating between Talented and Untalented Managers
Journal Of Investment Management, Vol. 1, No. 4, Fourth Quarter 2003
Posted: 1 Apr 2004
Ferguson and Leistikow  (FLa) was the first long-run risk-neutral analysis of the performance volatility incentives created by investment management fee structures. This paper extends FLa in six ways. It allows the portfolio's value to change, incorporates expected investment performance, and addresses expenses and distributions. It also shows the impact of paying investment management performance fees from the portfolio, and determines if the contract renewal structure and fee arrangements discriminate effectively among talented and untalented managers. Finally, it introduces a volatility-dependent contract renewal structure that provides good discrimination and strongly motivates manager behavior consistent with client preferences.
Keywords: Management Fee Incentives, Discrimination, Manager Talent, Fee Structures, Investment Management, Contract Renewal Arrangements
JEL Classification: G00
Suggested Citation: Suggested Citation