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Delegated portfolio management, optimal fee contracts, and asset prices

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  • Sato, Yuki

Abstract

This paper proposes a model of asset-market equilibrium with portfolio delegation and optimal fee contracts. Fund managers and investors strategically interact to determine funds' investment profiles, while they share portfolio risk through fee contracts. In equilibrium, their investment decisions, fee schedules, and stock price feed back into one another. The model predicts that (1) stock market's expected return and volatility increase as more investor capital is intermediated by funds, (2) fund's expense ratio is stable despite volatile market, (3) aggregate fund flow is positively (inversely) related to subsequent (past) market return, and (4) funds provide investors with a volatility hedge by adjusting market exposure counter-cyclically.

Suggested Citation

  • Sato, Yuki, 2016. "Delegated portfolio management, optimal fee contracts, and asset prices," Journal of Economic Theory, Elsevier, vol. 165(C), pages 360-389.
    • Handle: RePEc:eee:jetheo:v:165:y:2016:i:c:p:360-389
    DOI: 10.1016/j.jet.2016.05.002
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    Cited by:

    1. Andrea M. Buffa & Dimitri Vayanos & Paul Woolley, 2022. "Asset Management Contracts and Equilibrium Prices," Journal of Political Economy, University of Chicago Press, vol. 130(12), pages 3146-3201.
    2. Xiangyu Cui & Jianjun Gao & Yun Shi, 2021. "Multi-period mean–variance portfolio optimization with management fees," Operational Research, Springer, vol. 21(2), pages 1333-1354, June.
    3. Dumitrescu, Ariadna & Gil-Bazo, Javier, 2018. "Market frictions, investor sophistication, and persistence in mutual fund performance," Journal of Financial Markets, Elsevier, vol. 40(C), pages 40-59.

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    More about this item

    Keywords

    Portfolio delegation; Optimal fee; Asset prices; Price volatility; Fund size; Fund return;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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