UCL Discovery
UCL home » Library Services » Electronic resources » UCL Discovery

Are fund managers incentivised to ignore stock market jumps?

Chondrogiannis, Ilias; Freeman, Mark; Vivian, Andrew; (2023) Are fund managers incentivised to ignore stock market jumps? The European Journal of Finance 10.1080/1351847X.2022.2156804. (In press). Green open access

[thumbnail of Are fund managers incentivised to ignore stock market jumps.pdf]
Preview
Text
Are fund managers incentivised to ignore stock market jumps.pdf - Published Version

Download (3MB) | Preview

Abstract

In this paper, we show that the way in which fund managers are compensated can, under plausible conditions, lead them to act in a way that does not maximise the wellbeing of their clients. Due to performance bonuses in fund managers' rewards, there is a highly non-linear relationship between the wealth of the client and the fees that the manager receives. We demonstrate that jumps in equity returns can lead to a conflict of interest between the investor and the manager in such a setting. Specifically, the managers' option-type payment structure can incentivise them to not account for the downside risk induced by jumps, especially if the fund manager is only in post for a few years; thus managers may pursue a more aggressive asset allocation strategy than their clients desire. Our key policy recommendation is that regulators should consider imposing a negative fund fee in times of very poor absolute fund performance to mitigate against suboptimal fund management asset allocation decisions.

Type: Article
Title: Are fund managers incentivised to ignore stock market jumps?
Open access status: An open access version is available from UCL Discovery
DOI: 10.1080/1351847X.2022.2156804
Publisher version: https://doi.org/10.1080/1351847X.2022.2156804
Language: English
Additional information: Copyright © 2022 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group. This is an Open Access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives License (http://creativecommons.org/licenses/by-nc-nd/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original work is properly cited, and is not altered, transformed, or built upon in any way.
Keywords: Manager incentives, jump diffusion, portfolio optimisation, risk management, tail risk, clawbacks
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > SSEES
URI: https://discovery.ucl.ac.uk/id/eprint/10162635
Downloads since deposit
58Downloads
Download activity - last month
Download activity - last 12 months
Downloads by country - last 12 months

Archive Staff Only

View Item View Item