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Relative Performance Evaluation for Asset Managers: A Quantitative Assessment

Author

Listed:
  • Vincent Grégoire

    (HEC Montreal)

  • Sotes-Paladino Juan

    (Universidad de los Andes)

Abstract

Using a unique dataset of performance-fee mutual funds, we quantify incentives from relative performance evaluation (RPE) and their behavioral implications. We measure direct (short-term) incentives by the option delta embedded in performance fees and indirect (long-term) incentives via the value of future fees. RPE funds face stronger short-term and similar or weaker long-term incentives, yielding a more short-term compensation profile. Incentive sensitivity rises with benchmark risk, consistent with models of optimal contracting under learning. While stronger direct incentives increase active risk, long-horizon incentives attenuate this effect. However, performance effects are modest, and managerial skill is reflected mainly in base pay.

Suggested Citation

  • Vincent Grégoire & Sotes-Paladino Juan, 2026. "Relative Performance Evaluation for Asset Managers: A Quantitative Assessment," Working Papers 383, Red Nacional de Investigadores en Economía (RedNIE).
    • Handle: RePEc:aoz:wpaper:383
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    File URL: https://rednie.eco.unc.edu.ar/files/DT/383.pdf
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    References listed on IDEAS

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    1. Jennifer N. Carpenter, 2000. "Does Option Compensation Increase Managerial Risk Appetite?," Journal of Finance, American Finance Association, vol. 55(5), pages 2311-2331, October.
    2. Stavros Panageas & Mark M. Westerfield, 2009. "High‐Water Marks: High Risk Appetites? Convex Compensation, Long Horizons, and Portfolio Choice," Journal of Finance, American Finance Association, vol. 64(1), pages 1-36, February.
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    Keywords

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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