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What Maximum Fees Should Investors Pay to Active Fund Managers?

Author

Listed:
  • Chekib Ezzili

    (NATIXIS)

  • Patrice Poncet

    (ESSEC Business School)

Abstract

We develop a model in which investors can invest directly in the market at no cost or delegate their portfolio decisions to better informed active fund managers against fees. We derive the maximal fee an investor should pay and characterize it in terms of information differential or, equivalently, alpha. For example, the fee should be less than 6.60% if alpha is 6.83% over two years, and less than 51.9% if it is 73.3% over 5 years. Our simulation results are consistent with the empirical evidence we report on a large subset of active US mutual funds.

Suggested Citation

  • Chekib Ezzili & Patrice Poncet, 2014. "What Maximum Fees Should Investors Pay to Active Fund Managers?," Bankers, Markets & Investors, ESKA Publishing, issue 131, pages 5-16, July-Augu.
    • Handle: RePEc:rbq:journl:i:131:p:5-16
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    More about this item

    Keywords

    Portfolio Delegation; Alpha; Information Differential; Enlarged Filtration; Active Mutual Funds;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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