Mutual Fund Risk-Shifting and Management Contracts

  title={Mutual Fund Risk-Shifting and Management Contracts},
  author={Jung Hoon Lee and Charles Trzcinka and Shyam Sunder Venkatesan},
We find evidence that risk-shifting by mutual fund managers is linked to their asymmetric performance-based compensation. We show that managers whose mid-year performance is close to their announced benchmark increase their portfolio risk in the second part of the year. As their performance deviates from the benchmark, their risk-shifting decreases except for the most extreme deviations. We find that the deviation from the benchmark dominates the incentives from the flow-performance… 
Benchmark Discrepancies and Mutual Fund Performance Evaluation
It is found that funds with a benchmark discrepancy tend to be riskier than their prospectus benchmarks indicate, and the funds on average outperform their prospectu benchmarks, before further risk adjustments, despite underperforming the benchmarks that best match their portfolios.
How Does Illiquidity Affect Delegated Portfolio Choice?
In response to how they are compensated, mutual fund managers who are underperforming by mid-year are likely to increase the risk of their portfolios toward the year-end. We argue that an increase in
Risk shifting consequences depending on manager characteristics
Economic Policy Uncertainty and Learning: Theory and Evidence on Mutual Funds
Using the mutual fund industry as a laboratory, we demonstrate theoretically and empirically that economic policy uncertainty affects investment decisions through an information rather than real
The Atalanta Effect: How High-Powered Compensation Reduces Risk-Taking
Agents frequently compete for both relative-performance rewards — mutual fund inflows generated by rankings, executive promotions and compensation based on peer comparisons, rank-dependent social
Reaching for Yield in Corporate Bond Mutual Funds
We examine “reaching for yield” in U.S. corporate bond mutual funds. We define reaching for yield as tilting portfolios toward bonds with yields higher than the benchmarks. We find that funds


Incentive Contracts and Hedge Fund Management
We investigate incentive effects of a typical hedge fund contract for a manager with power utility. With a one-year horizon, the manager displays risk taking that varies dramatically with fund value.
Equilibrium Prices in the Presence of Delegated Portfolio Management
This paper analyzes the asset pricing implications of commonly used portfolio management contracts linking the compensation of fund managers to the excess return of the managed portfolio over a
Portfolio Manager Compensation and Mutual Fund Performance
We use a novel dataset to study the relation between individual portfolio manager compensation and mutual fund performance. Managers with explicit performance-based pay exhibit superior subsequent
Outsourcing Mutual Fund Management: Firm Boundaries, Incentives and Performance
We investigate the effects of managerial outsourcing on the performance and incentives of mutual funds. Fund families outsource the management of a large fraction of their funds to advisory firms.
Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry
The authors test the hypothesis that, when their compensation is linked to relative performance, managers of investment portfolios likely to end up as 'losers' will manipulate fund risk differently
Performance Changes following Top Management Turnover: Evidence from Open-End Mutual Funds
I examine the impact of mutual fund manager replacement on subsequent fund performance. Using a sample of 393 domestic equity and bond fund managers that were replaced over the 1979–1991 period, for
Incentive Contracts in Delegated Portfolio Management
This paper analyzes optimal non-linear portfolio management contracts. We consider a setting where the investor faces moral hazard with respect to the effort and risk choices of the portfolio
Performance Evaluation and Self-Designated Benchmark Indexes in the Mutual Fund Industry
Almost one-third of actively managed, diversified U.S. equity mutual funds specify a size and value/growth benchmark index in the fund prospectus that does not match the fund's actual style.