Fee structure and equity fund manager’s optimal locking in profits strategy

David Dickinson, Xuyuan Han, Zhenya Liu and Yaosong Zhan

International Review of Financial Analysis, 2024, vol. 96, issue PA

Abstract: We study the effects of fee structures on fund managers’ strategies for locking in profits. Utilizing the optimal stopping time method, we identify two critical portfolio value thresholds that signal when a manager will choose to lock in profits. Fee components such as management fees, self-investment ratios, and high-water marks significantly influence these decisions. Specifically, higher management fees are associated with increased risk aversion, leading to a narrower continuation region, indicating a preference for lower risk. Conversely, performance fees encourage greater risk-taking. We use the S&P 500 Index and NASDAQ Composite index as representatives of managers’ portfolios and apply our model to illustrate how managers adjust their profit-locking strategies in response to their desired rewards.

Keywords: Fee structure; Optimal stopping method; Lock in profits (search for similar items in EconPapers)
JEL-codes: G01 G11 G23 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:96:y:2024:i:pa:s105752192400543x

DOI: 10.1016/j.irfa.2024.103611

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