The Real Cost of Asymmetric Incentive Fees

32 Pages Posted: 3 Mar 2005

See all articles by Danilo Drago

Danilo Drago

SDA Bocconi

Valter Lazzari

LIUC Università Cattaneo; SDA Bocconi School of Management

Marco A. Navone

Finance Discipline Group - UTS Business School; Bocconi University - CAREFIN - Centre for Applied Research in Finance; Financial Research Network (FIRN)

Date Written: January 2005

Abstract

In this paper using a unique database of mutual funds that charge asymmetric incentive fees we evaluate the ex ante cost of these variable compensations as the premium of a spread option on the active return of the fund. We find that the cost of the asymmetric fee can be very high and that it's very difficult for the typical to forecast this cost looking at the structure of the fee or at the tracking error of the fund without a formal evaluation technique. We also find out that the value of the fee is highly sensible to market conditions an can vary through time even without changes in the fee structure or in the fund investment policy. Given these evidences we conclude that the ex ante cost of the fee should be included in the information to prospective investors and should be considered in the fund performance evaluation.

Keywords: Mutual funds, incentive fees, asymmetric compensation

JEL Classification: G18, G23

Suggested Citation

Drago, Danilo and Lazzari, Valter and Navone, Marco A., The Real Cost of Asymmetric Incentive Fees (January 2005). Available at SSRN: https://ssrn.com/abstract=677381 or http://dx.doi.org/10.2139/ssrn.677381

Danilo Drago

SDA Bocconi ( email )

Via Bocconi 8
Milan, Milan 20136
Italy

Valter Lazzari

LIUC Università Cattaneo ( email )

Corso Matteotti
Castellanza (VA)
Italy
+39-0331572205 (Phone)

SDA Bocconi School of Management ( email )

Via Bocconi 8
Milan, Milan 20136
Italy
+39-3334993014 (Phone)

Marco A. Navone (Contact Author)

Finance Discipline Group - UTS Business School ( email )

Haymarket
Sydney, NSW 2007
Australia

Bocconi University - CAREFIN - Centre for Applied Research in Finance

Via Sarfatti, 25
Milan, 20136
Italy

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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