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Superior information and compensation fees of active mutual funds

Author

Listed:
  • Ezzili, Chekib

    (Equity Derivatives, NATIXIS)

  • Poncet, Patrice

    (ESSEC Business School)

Abstract

We posit a fund manager and an individual investor who maximize the expected (log) utility of their respective terminal wealth. The manager possesses more information than the investor does and charges the latter, their would-be customer, a linear compensation fee. The investor will delegate their portfolio decisions to the manager if, and only if, the expected utility of their wealth after fees is larger than the expected utility they can achieve by directly investing in the market. Our framework, which uses a mathematical result by [Amendinger (2000)], allows us to characterize compensation fees in terms of information differential.

Suggested Citation

  • Ezzili, Chekib & Poncet, Patrice, 2013. "Superior information and compensation fees of active mutual funds," Journal of Financial Perspectives, EY Global FS Institute, vol. 1(3), pages 143-154.
    • Handle: RePEc:ris:jofipe:0030
    as

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    More about this item

    Keywords

    Compensation fees; Portfolio delegation; asset allocation; alpha; filtration enlargement.;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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