Delegated portfolio management, optimal fee contracts, and asset prices

Sato, Yuki

doi:10.1016/j.jet.2016.05.002

Cited by 6 publications

(1 citation statement)

References 41 publications

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“…7 Other papers on the equilibrium effects of benchmarking include Qiu (2017) and Cvitanic and Xing (2018). See also Garcia and Vanden (2009), Gorton, He, and Huang (2010), Kyle, Ou-Yang, and Wei (2011), Malamud and Petrov (2014), Sato (2016), Huang (2018) and Sockin and Xiaolan (2018) for other models that determine jointly asset management contracts and equilibrium prices.…”

Section: Introductionmentioning

confidence: 99%

Asset Management Contracts and Equilibrium Prices

Buffa¹,

Vayanos

Woolley

2014

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We study the joint determination of fund managers' contracts and equilibrium asset prices.Because of agency frictions, investors make managers' fees more sensitive to performance and benchmark performance against a market index. This makes managers unwilling to deviate from the index and exacerbates price distortions. Because trading against overvaluation exposes managers to greater risk of deviating from the index than trading against undervaluation, agency frictions bias the aggregate market upwards. They can also generate a negative relationship between risk and return because they raise the volatility of overvalued assets. Socially optimal contracts provide steeper performance incentives and cause larger pricing distortions than privately optimal contracts. *

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Section: Introductionmentioning

confidence: 99%

Asset Management Contracts and Equilibrium Prices

Buffa¹,

Vayanos

Woolley

2014

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Multi-period mean–variance portfolio optimization with management fees

2019

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Market frictions, investor sophistication, and persistence in mutual fund performance

Dumitrescu

Gil-Bazo

2018

Journal of Financial Markets

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If there are diseconomies of scale in asset management, any predictability in mutual fund performance will be arbitraged away by rational investors seeking funds with the highest expected performance (Berk and Green, 2004). In contrast, the performance of US equity mutual funds persists through time. In this paper, we report evidence that persistence is less prevalent among hard-to-find funds and investigate whether market frictions can reconcile the assumptions of investor rationality and diseconomies of scale with the empirical evidence. In particular, we extend the setting of Berk and Green (2004) to include entry costs and account for investor heterogeneity in financial sophistication, which we model as differences in reservation returns and the degree of financial constrainedness across investors. We show that for low levels of managerial skill, more visible funds, which are available to a broad set of investors, underperform less visible funds, which are only available to the most sophisticated investors. As managerial skill rises, funds with less sophisticated investors can outperform funds with more sophisticated investors, as a consequence of the interaction of entry costs with financial constraints. Therefore, for a range of managerial skill, hard-to-find funds exhibit less dispersion in equilibrium expected performance. Using data on US equity mutual funds in the 1996-2010 period and different proxies for fund visibility, we find empirical evidence that differences in observed performance are significantly less persistent among hard-to-find funds than otherwise similar funds.JEL codes: G2; G23.

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Delegated portfolio management, optimal fee contracts, and asset prices

Cited by 6 publications

References 41 publications

Asset Management Contracts and Equilibrium Prices

Asset Management Contracts and Equilibrium Prices

Multi-period mean–variance portfolio optimization with management fees

Market frictions, investor sophistication, and persistence in mutual fund performance

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