On relative performance, remuneration and risk taking of asset managers

Emilio Barucci (), Gaetano Bua () and Daniele Marazzina ()
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Emilio Barucci: Politecnico di Milano
Gaetano Bua: Politecnico di Milano
Daniele Marazzina: Politecnico di Milano

Annals of Finance, 2018, vol. 14, issue 4, No 4, 517-545

Abstract: Abstract We analyze the asset management problem when the manager is remunerated through a scheme based on the performance of the fund with respect to a benchmark and his/her choices are driven by a power utility function. We show that it is not the asymmetric-fulcrum type feature of the scheme that makes the difference in preventing excessive risk taking in case of a poor performance. To prevent gambling when the performance deteriorates, it is important not to provide a fixed fee to the asset manager, and that remuneration is sensitive to a very poor relative performance as in the case of a capital stake or of a management fee with flow funds. We provide empirical evidence on the mutual fund industry showing excessive risk taking in case of a very poor performance and limited risk taking in case of overperformance with respect to the benchmark. These results agree with a remuneration scheme including a fixed fee and a cap.

Keywords: Relative performance; Remuneration; Asset manager; Portfolio (search for similar items in EconPapers)
JEL-codes: G11 G23 G32 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s10436-018-0324-5

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