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Do Portfolio Manager Contracts Contract Portfolio Management?

Author

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  • JUNG HOON LEE
  • CHARLES TRZCINKA
  • SHYAM VENKATESAN

Abstract

Most mutual fund managers have performance‐based contracts. Our theory predicts that mutual fund managers with asymmetric contracts and mid‐year performance close to their announced benchmark increase their portfolio risk in the second part of the year. As predicted by our theory, performance deviation from the benchmark decreases risk‐shifting only for managers with performance contracts. Deviation from the benchmark dominates incentives from the flow‐performance relation, suggesting that risk‐shifting is motivated more by management contracts than by a tournament to capture flows.

Suggested Citation

  • Jung Hoon Lee & Charles Trzcinka & Shyam Venkatesan, 2019. "Do Portfolio Manager Contracts Contract Portfolio Management?," Journal of Finance, American Finance Association, vol. 74(5), pages 2543-2577, October.
    • Handle: RePEc:bla:jfinan:v:74:y:2019:i:5:p:2543-2577
    DOI: 10.1111/jofi.12823
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    Cited by:

    1. Servaes, Henri & Sigurdsson, Kari, 2022. "The Costs and Benefits of Performance Fees in Mutual Funds," Journal of Financial Intermediation, Elsevier, vol. 50(C).
    2. Akhilesh KUMAR & Mohammad SHAHID, 2021. "Portfolio selection problem: Issues, challenges and future prospectus," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(4(629), W), pages 71-90, Winter.
    3. Li, C. Wei & Tiwari, Ashish & Tong, Lin, 2022. "Mutual fund tournaments and fund Active Share," Journal of Financial Stability, Elsevier, vol. 63(C).
    4. Cui, Xuegang & Feltovich, Nick & Zhang, Kun, 2022. "Incentive schemes, framing, and market behaviour: Evidence from an asset-market experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 197(C), pages 301-324.
    5. Sheng, Jiliang & Xu, Si & An, Yunbi & Yang, Jun, 2021. "Dynamic portfolio strategy by loss-averse fund managers facing performance-induced fund flows," International Review of Financial Analysis, Elsevier, vol. 73(C).

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