We develop a principal-agent model based on a sequential game played by a representative investor and a fund manager in an asymmetric information framework. The model shows that investors’ perceptions of the fund market play the key role in the fund’s fee-setting mechanism. The managers’...

Performance of investment managers are evaluated in comparison with benchmarks, such as financial indices. Due to the operational constraint that most professional databases do not track the change of constitution of benchmark portfolios, standard tests of performance suffer from the...