Understanding Fee Structures in the Asset Management Business
AbstractThis paper considers the economic role of fees in aligning the incentives of money managers with those of investors. We examine a simple model in which manager effort (or investment in human and physical capital) is observed by the investor prior to her investment decision, but is not verifiable. This setup creates a positive economic role for net asset value (NAV) as a contracting variable and thus provides an explanation for the widespread use of contracts based on NAV in both the mutual and hedge fund industries. We also provide an explanation for why hedge funds use asymmetric performance fees while mutual funds typically charge a fixed fraction of NAV (even though 'fulcrum' performance fees are available).
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Bibliographic InfoPaper provided by New York University, Leonard N. Stern School of Business- in its series New York University, Leonard N. Stern School Finance Department Working Paper Seires with number 98-050.
Date of creation: 17 Dec 1997
Date of revision:
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Postal: U.S.A.; New York University, Leonard N. Stern School of Business, Department of Economics . 44 West 4th Street. New York, New York 10012-1126
Phone: (212) 998-0100
Web page: http://w4.stern.nyu.edu/finance/
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- Golec, Joseph & Starks, Laura, 2004. "Performance fee contract change and mutual fund risk," Journal of Financial Economics, Elsevier, vol. 73(1), pages 93-118, July.
- Sanjiv Ranjan Das & Rangarajan K. Sundaram, 1998. "Fee Speech: Adverse Selection and the Regulation of Mutual Funds," NBER Working Papers 6644, National Bureau of Economic Research, Inc.
- Uday Rajan & Sanjay Srivastava, 2000. "Portfolio Delegation with Limited Liability," Econometric Society World Congress 2000 Contributed Papers 1503, Econometric Society.
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