Capital Commitment and Performance: The Role of Mutual Fund Charges

Juan-Pedro Gómez, Melissa Porras Prado and Rafael Zambrana

Journal of Financial and Quantitative Analysis, 2024, vol. 59, issue 2, 727-758

Abstract: We study how the scarcity of committed capital affects the equilibrium distribution of net alphas in the asset management industry. We propose a model of active portfolio management with different sales fee structures where committed capital is in short supply. In the model, a portfolio’s excess return is not fully appropriated by the money manager but shared with long-term investors. Empirically, we show that capital commitment allows funds to hold shares longer and take advantage of slow-moving arbitrage opportunities. Consistent with the model, funds with more committed capital generate higher value added, which, net of fees, accrues to long-term investors.

Date: 2024
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