On the Regulation of Mutual Fund Fee Structures

Posted: 8 May 1998

See all articles by Rangarajan K. Sundaram

Rangarajan K. Sundaram

New York University (NYU) - Department of Finance

Sanjiv Ranjan Das

Santa Clara University - Leavey School of Business

Date Written: March 1998

Abstract

We propose a new framework for the analysis of mutual funds and use it to examine the rationale behind existing regulations that require mutual fund adviser fees to be of the "fulcrum" variety. We find little justification for the regulations. Indeed, we find that asymmetric "incentive fees" in which the adviser receives a flat fee plus a bonus for exceeding a benchmark index provide Pareto-dominant outcomes with a lower level of equilibrium volatility.

Our model also offers some insight into fee structures actually in use in the asset-management industry. We find that when leveraging is not permitted and the fee structure must be of the fulcrum variety, the equilibrium fee in our model is a flat fee with no performance component; while if asymmetric incentive fees are allowed and leveraging is permitted the equilibrium fee is an incentive fee with a large performance component. These predictions match observed fee structures in the mutual fund industry and the hedge fund industry, respectively.

JEL Classification: G23, G28, G11, C72

Suggested Citation

Sundaram, Rangarajan K. and Das, Sanjiv Ranjan, On the Regulation of Mutual Fund Fee Structures (March 1998). Available at SSRN: https://ssrn.com/abstract=85250

Rangarajan K. Sundaram (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0308 (Phone)
212-995-4233 (Fax)

Sanjiv Ranjan Das

Santa Clara University - Leavey School of Business ( email )

Department of Finance
316M Lucas Hall
Santa Clara, CA 95053
United States

HOME PAGE: http://algo.scu.edu/~sanjivdas/

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