Fee for Service, Outperformance or Assets Under Management? Indications from Generalized Log Utility
20 Pages Posted: 24 Aug 2010
Date Written: August 23, 2010
Abstract
We investigate efficient fee structures for actively managed funds when both the investor-principal and the prospective manager-agent have utility functions of the generalized log variety. Efficient fees include a fixed component that reflects the manager’s protected consumption. This is a new rationale for a flat component of fees analogous to fee-for-service. Also new is our result that participation is not all or nothing. Specifically, the amount placed with the active manager is equal to the investor’s wealth less the present value of the total protected consumption of the investor and the manager. Efficient fees also include variable components reflecting total assets under management and performance relative to a passive benchmark.
Keywords: Flat fee, Asset fee, Benchmarked fee, Agency, Adverse selection, Moral hazard
JEL Classification: G11, G23, D82
Suggested Citation: Suggested Citation
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