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19.04.2018 | Research Article

On relative performance, remuneration and risk taking of asset managers

verfasst von: Emilio Barucci, Gaetano La Bua, Daniele Marazzina

Erschienen in: Annals of Finance | Ausgabe 4/2018

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Abstract

We analyze the asset management problem when the manager is remunerated through a scheme based on the performance of the fund with respect to a benchmark and his/her choices are driven by a power utility function. We show that it is not the asymmetric-fulcrum type feature of the scheme that makes the difference in preventing excessive risk taking in case of a poor performance. To prevent gambling when the performance deteriorates, it is important not to provide a fixed fee to the asset manager, and that remuneration is sensitive to a very poor relative performance as in the case of a capital stake or of a management fee with flow funds. We provide empirical evidence on the mutual fund industry showing excessive risk taking in case of a very poor performance and limited risk taking in case of overperformance with respect to the benchmark. These results agree with a remuneration scheme including a fixed fee and a cap.

Vorheriger Artikel Option pricing under fast-varying and rough stochastic volatility

Nächster Artikel Analysis of the SRISK measure and its application to the Canadian banking and insurance industries

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We concentrate our attention on a partial equilibrium analysis (we take the remuneration contract as given), for a general equilibrium/principal-agent analysis of the remuneration of the asset manager we refer among the others to Admati and Pfleiderer (1997), Das and Sundaram (2002), Lynch and Musto (1997) and Ou-Yang (2003).

In the above papers, the remuneration is a function of the relative performance either through the flow of funds or directly through the remuneration scheme. In the first case, Basak et al. (2007) assume that the manager is remunerated through a coefficient (management fee) which applies to the AUM, the coefficient being a nonlinear function of the relative performance of the fund with respect to the benchmark. Using our notation-introduced in Sect. 2—the remuneration is of the form F(T)P(X(T)). See also Nicolosi et al. (2017). Chen and Pennacchi (2009) directly consider that the AUM are a smooth concave increasing function of the relative performance of the fund, see also Cuoco and Kaniel (2011) and Koijen (2014).

In the general case, the sensitivity of the remuneration is m for \(X(T) < 1\), \(m+p-c\) for \(X(T) > H\) and is \(m + p\) for \(1< X(T) < H\)

As an example, Assumption 3 holds true if \(a=-\,0.5; m=0.02; K=0.5; c=0.02; H_1=5; H_2=3; p=0.2\). If \(K=0.2\) Assumption 4 holds true (other parameters as above). Moreover, if \(K=0.08\) none of the two assumptions hold true: in this case a concavification is still possible in the sense of Assumption 4, with \(\widehat{x}_d=H_2\), and with a concavified utility function with a first order derivative not well defined in \(H_2\) [see Buraschi et al. (2014) for further details].

For the sake of completeness, we point out that these results are not directly comparable to those obtained in Basak et al. (2007) where the findings support the hypothesis \(Hp^1\). Indeed, Basak et al. (2007) concentrate their analysis on funds with managers with a high risk aversion coefficient.

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Titel: On relative performance, remuneration and risk taking of asset managers
verfasst von: Emilio Barucci
Gaetano La Bua
Daniele Marazzina
Publikationsdatum: 19.04.2018
Verlag: Springer Berlin Heidelberg
Erschienen in: Annals of Finance / Ausgabe 4/2018
Print ISSN: 1614-2446
Elektronische ISSN: 1614-2454
DOI: https://doi.org/10.1007/s10436-018-0324-5

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