Published in:Darden Business School Working Paper ; No. 3441308
Extent:
1 Online-Ressource (48 p)
Language:
English
DOI:
10.2139/ssrn.3441308
Identifier:
Origination:
Footnote:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments March 16, 2020 erstellt
Description:
We examine the role of peer (e.g., Lipper indices) vs. pure (i.e., market indices) benchmarks in the compensation contract of mutual fund managers. We first model the impact of peer vs. pure benchmarks on fund manager incentives. Then, using a unique hand-collected dataset, we test the predictions of that model. We find that 21% (29%) of our sample funds report their managers' compensation based only on a peer (pure) benchmark, with the remaining portfolio managers compensated based on a combination of both. Consistent with our model's predictions, funds with peer-benchmark compensated managers charge higher fees, but still outperform on a risk-adjusted net performance basis. Also consistent with the model, peer-benchmarked managers exhibit higher active share and tracking error, as well as lower R-squared. Finally, we empirically analyze the choice between the two benchmark types in practice. We find that managers compensated with peer benchmarks tend to work for funds that have more sophisticated investors and families with stronger incentives for internal competition, consistent with market segmentation playing a role in the choice between peer and pure benchmarked compensation contracts