What Maximum Fees Should Investors Pay to Active Fund Managers?

Chekib Ezzili and Patrice Poncet
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Chekib Ezzili: NATIXIS
Patrice Poncet: ESSEC Business School

Bankers, Markets & Investors, 2014, issue 131, 5-16

Abstract: We develop a model in which investors can invest directly in the market at no cost or delegate their portfolio decisions to better informed active fund managers against fees. We derive the maximal fee an investor should pay and characterize it in terms of information differential or, equivalently, alpha. For example, the fee should be less than 6.60% if alpha is 6.83% over two years, and less than 51.9% if it is 73.3% over 5 years. Our simulation results are consistent with the empirical evidence we report on a large subset of active US mutual funds.

Keywords: Portfolio Delegation; Alpha; Information Differential; Enlarged Filtration; Active Mutual Funds (search for similar items in EconPapers)
JEL-codes: G15 G18 G23 (search for similar items in EconPapers)
Date: 2014
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