We analyze the asset management problem when the manager is remunerated through a scheme based on the performance of the fund with respect to a benchmark and his/her choices are driven by a power utility function. We show that it is not the asymmetric-fulcrum type feature of the scheme that makes the difference in preventing excessive risk taking in case of a poor performance. To prevent gambling when the performance deteriorates, it is important not to provide a fixed fee to the asset manager, and that remuneration is sensitive to a very poor relative performance as in the case of a capital stake or of a management fee with flow funds. We provide empirical evidence on the mutual fund industry showing excessive risk taking in case of a very poor performance and limited risk taking in case of overperformance with respect to the benchmark. These results agree with a remuneration scheme including a fixed fee and a cap.
On relative performance, remuneration and risk taking of asset managers
Barucci, Emilio;Marazzina, Daniele
2018-01-01
Abstract
We analyze the asset management problem when the manager is remunerated through a scheme based on the performance of the fund with respect to a benchmark and his/her choices are driven by a power utility function. We show that it is not the asymmetric-fulcrum type feature of the scheme that makes the difference in preventing excessive risk taking in case of a poor performance. To prevent gambling when the performance deteriorates, it is important not to provide a fixed fee to the asset manager, and that remuneration is sensitive to a very poor relative performance as in the case of a capital stake or of a management fee with flow funds. We provide empirical evidence on the mutual fund industry showing excessive risk taking in case of a very poor performance and limited risk taking in case of overperformance with respect to the benchmark. These results agree with a remuneration scheme including a fixed fee and a cap.File | Dimensione | Formato | |
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