General equilibrium implications of fund managers' compensation fees
This paper analyzes the general equilibrium implications of performance fees linking the compensation of fund managers to the return of the managed portfolio relative to that of a benchmark portfolio. We find that symmetric ("fulcrum") performance fees distort the allocation of managed portfolios in a way that induces a significant positive effect on the equilibrium prices of stocks included in the benchmark portfolio, a significant negative effect on their equilibrium Sharpe ratios, and a marginally positive effect on their equilibrium volatilities: these implications of the model are consistent with the available empirical evidence. We also find that asymmetric performance fees can generate the opposite pricing implications. Moreover, asymmetric performance fees result in lower volatilities for benchmark stocks than for nonbenchmark stocks. Finally, we document that, within the class of fee structures we consider, some amount of benchmarking can improve the welfares of fund investors.
Year of publication: |
1999-01-01
|
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Authors: | Kaniel, Ron |
Publisher: |
ScholarlyCommons |
Saved in:
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