The Real Cost of Asymmetric Incentive Fees

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