Incentive Fees and Mutual Funds

Edwin J. Elton, Martin J. Gruber and Christopher R. Blake
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Edwin J. Elton: New York University, USA
Martin J. Gruber: New York University, USA
Christopher R. Blake: Fordham University, USA

Chapter 11 in Investments and Portfolio Performance, 2010, pp 209-234 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThis paper examines the effect of incentive fees on the behavior of mutual fund managers. Funds with incentive fees exhibit positive stock selection ability, but a beta less than one results in funds not earning positive fees. From an investor's perspective, positive alphas plus lower expense ratios make incentive-fee funds attractive. However, incentive-fee funds take on more risk than non-incentive-fee funds, and they increase risk after a period of poor performance. Incentive fees are useful marketing tools, since more new cash flows go into incentive-fee funds than into non-incentive-fee funds, ceteris paribus.

Keywords: Investments; Portfolio Management; Bond Pricing; Pension Funds; Estimating Taxes (search for similar items in EconPapers)
Date: 2010
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