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Are fund managers rewarded for taking cyclical risks?

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  • Ryan, Ellen

Abstract

The investment fund sector has expanded dramatically since 2008, increasing the capacity for its risk-taking to generate negative spillovers. This paper provides empirical evidence for the existence of wide-spread risk-taking incentives in the investment fund sector, with a particular focus on incentives for synchronized, cyclical risk-taking which could have systemic risk implications. Incentives arise from the positive response of investors to returns achieved through cyclical risk-taking and non-linearities in the relationship between fund returns and fund flows. The fact that market discipline may not be sufficient to ensure prudent behavior among managers creates a clear case for macroprudential regulatory intervention.

Suggested Citation

  • Ryan, Ellen, 2024. "Are fund managers rewarded for taking cyclical risks?," Journal of Financial Markets, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:finmar:v:68:y:2024:i:c:s1386418124000119
    DOI: 10.1016/j.finmar.2024.100893
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    More about this item

    Keywords

    Financial stability; Investment funds; Incentive; Risk-taking; Macroprudential policy;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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