Information Differential and Compensation of Active Fund Managers

28 Pages Posted: 27 Aug 2012

See all articles by Chekib Ezzili

Chekib Ezzili

ESSEC Business School; Université Paris I Pantheon Sorbonne

Patrice Poncet

ESSEC Business School; Universite Paris I Pantheon Sorbonne

Date Written: August 9, 2012

Abstract

We posit a fund manager and an individual investor who maximize the expected (log) utility of their respective terminal wealth. The manager possesses more information than the investor does and charges the latter, her would-be customer, a linear compensation fee. The investor will delegate his portfolio decisions to the manager if and only if the expected utility of his wealth after fees is larger than the expected utility he can achieve by directly investing in the market. Our framework, which uses a result by Amendinger (2000) on initially enlarged filtrations, allows us to characterize compensation fees in terms of information differential.

Keywords: portfolio delegation, filtration enlargement, information differential

JEL Classification: C65, G11, G23

Suggested Citation

Ezzili, Chekib and Poncet, Patrice, Information Differential and Compensation of Active Fund Managers (August 9, 2012). Available at SSRN: https://ssrn.com/abstract=2127897 or http://dx.doi.org/10.2139/ssrn.2127897

Chekib Ezzili

ESSEC Business School ( email )

3 Avenue Bernard Hirsch
CS 50105 CERGY
CERGY, CERGY PONTOISE CEDEX 95021
France

Université Paris I Pantheon Sorbonne ( email )

Finance Department
17 rue de la Sorbonne
Paris, IL
France

Patrice Poncet (Contact Author)

ESSEC Business School ( email )

Avenue Bernard Hirsch
BP 105 Cergy Cedex, 95021
France
33 1 3443 3000 (Phone)
33 1 3443 3001 (Fax)

Universite Paris I Pantheon Sorbonne ( email )

Finance Department, UFR 06
17 rue de la Sorbonne
75005 Paris
France
33 1 40 46 2783 (Phone)
33 1 40 46 33 66 (Fax)

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