Are fund managers rewarded for taking cyclical risks?

Ellen Ryan

Journal of Financial Markets, 2024, vol. 68, issue C

Abstract: The investment fund sector has expanded dramatically since 2008, increasing the capacity for its risk-taking to generate negative spillovers. This paper provides empirical evidence for the existence of wide-spread risk-taking incentives in the investment fund sector, with a particular focus on incentives for synchronized, cyclical risk-taking which could have systemic risk implications. Incentives arise from the positive response of investors to returns achieved through cyclical risk-taking and non-linearities in the relationship between fund returns and fund flows. The fact that market discipline may not be sufficient to ensure prudent behavior among managers creates a clear case for macroprudential regulatory intervention.

Keywords: Financial stability; Investment funds; Incentive; Risk-taking; Macroprudential policy (search for similar items in EconPapers)
JEL-codes: G11 G23 G28 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:68:y:2024:i:c:s1386418124000119

DOI: 10.1016/j.finmar.2024.100893

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