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Fund Families as Delegated Monitors of Money Managers

Author

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  • Simon Gervais
  • Anthony W. Lynch
  • David K. Musto

Abstract

Because a money manager learns more about her skill from her management experience than outsiders can learn from her realized returns, she expects inefficiency in future contracts that condition exclusively on realized returns. A fund family that learns what the manager learns can reduce this inefficiency cost if the family is large enough. The family's incentive is to retain any given manager regardless of her skill but, when the family has enough managers, it adds value by boosting the credibility of its retentions through the firing of others. As the number of managers grows, the efficiency loss goes to zero. Copyright 2005, Oxford University Press.

Suggested Citation

  • Simon Gervais & Anthony W. Lynch & David K. Musto, 2005. "Fund Families as Delegated Monitors of Money Managers," Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1139-1169.
  • Handle: RePEc:oup:rfinst:v:18:y:2005:i:4:p:1139-1169
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    File URL: http://hdl.handle.net/10.1093/rfs/hhi031
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    Citations

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    Cited by:

    1. Agarwal, Vikas & Nada, Vikram & Ray, Sugata, 2013. "Institutional investment and intermediation in the hedge fund industry," CFR Working Papers 13-03, University of Cologne, Centre for Financial Research (CFR).
    2. Ping Hu & Jayant R. Kale & Marco Pagani & Ajay Subramanian, 2011. "Fund Flows, Performance, Managerial Career Concerns, and Risk Taking," Management Science, INFORMS, vol. 57(4), pages 628-646, April.
    3. Mason, Andrew & Agyei-Ampomah, Sam & Skinner, Frank, 2016. "Realism, skill, and incentives: Current and future trends in investment management and investment performance," International Review of Financial Analysis, Elsevier, vol. 43(C), pages 31-40.
    4. Bessler, Wolfgang & Blake, David & Lückoff, Peter & Tonks, Ian, 2010. "Why does mutual fund performance not persist? The impact and interaction of fund flows and manager changes," MPRA Paper 34185, University Library of Munich, Germany.
    5. Agarwal, Vikas & Ma, Linlin, 2013. "Managerial multitasking in the mutual fund industry," CFR Working Papers 13-10, University of Cologne, Centre for Financial Research (CFR).
    6. Johnson, Woodrow T., 2010. "Who incentivizes the mutual fund manager, new or old shareholders?," Journal of Financial Intermediation, Elsevier, vol. 19(2), pages 143-168, April.
    7. He, Zhiguo & Xiong, Wei, 2013. "Delegated asset management, investment mandates, and capital immobility," Journal of Financial Economics, Elsevier, vol. 107(2), pages 239-258.
    8. García, Diego & Vanden, Joel M., 2009. "Information acquisition and mutual funds," Journal of Economic Theory, Elsevier, vol. 144(5), pages 1965-1995, September.
    9. Agarwal, Vikas & Ma, Linlin & Mullally, Kevin, 2015. "Managerial multitasking in the mutual fund industry," CFR Working Papers 13-10 [rev.], University of Cologne, Centre for Financial Research (CFR).
    10. Clemens Sialm & T. Mandy Tham, 2016. "Spillover Effects in Mutual Fund Companies," Management Science, INFORMS, vol. 62(5), pages 1472-1486, May.
    11. Wang, Jian & Wang, Xiaoting & Zhuang, Xintian & Yang, Jun, 2017. "Optimism bias, portfolio delegation, and economic welfare," Economics Letters, Elsevier, vol. 150(C), pages 111-113.
    12. Zhiguo He & Wei Xiong, 2008. "Delegated Asset Management, Investment Mandates, and Capital Immobility," NBER Working Papers 14574, National Bureau of Economic Research, Inc.

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