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On the Regulation of Fee Structures in Mutual Funds

Author: Sanjiv Ranjan Das; Rangarajan K Sundaram
Publisher: Cambridge, Mass. National Bureau of Economic Research 1998.
Series: Working paper series (National Bureau of Economic Research), no. w6639.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
We offer an alternative framework for the analysis of mutual funds and use it to examine the rationale behind existing regulations that require mutual fund advisor fees to be of the fulcrum' variety. We find little justification for the regulations. Indeed, we find that asymmetric incentive fees' in which the advisor receives a flat fee plus a bonus for exceeding a benchmark index provide Pareto-dominant outcomes  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Sanjiv Ranjan Das; Rangarajan K Sundaram
OCLC Number: 1027359922
Notes: July 1998.
Description: 1 online resource.
Series Title: Working paper series (National Bureau of Economic Research), no. w6639.
Responsibility: Sanjiv Ranjan Das, Rangarajan K. Sundaram.

Abstract:

We offer an alternative framework for the analysis of mutual funds and use it to examine the rationale behind existing regulations that require mutual fund advisor fees to be of the fulcrum' variety. We find little justification for the regulations. Indeed, we find that asymmetric incentive fees' in which the advisor receives a flat fee plus a bonus for exceeding a benchmark index provide Pareto-dominant outcomes with a lower level of equilibrium volatility. Our model also offers some insight into fee structures actually in use in the asset-management industry. We find that when leveraging is not permitted and the fee structure must be of the fulcrum variety, the equilibrium fee in our model is a flat fee with no performance component; if asymmetric incentive fees are allowed and leveraging is permitted the equilibrium fee is an incentive fee with a large performance component. These predictions match observed fee structures in the mutual fund industry and the hedge fund industry, respectively.

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