Incentive Fees and Mutual Funds

Authors: Elton E.J.¹; Gruber M.J.¹; Blake C.R.²

Source: The Journal of Finance, Volume 58, Number 2, April 2003 , pp. 779-804(26)

Publisher: Blackwell Publishing

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Abstract:

This paper examines the effect of incentive fees on the behavior of mutual fund managers. Funds with incentive fees exhibit positive stock selection ability, but a beta less than one results in funds not earning positive fees. From an investor's perspective, positive alphas plus lower expense ratios make incentive-fee funds attractive. However, incentive-fee funds take on more risk than non-incentive-fee funds, and they increase risk after a period of poor performance. Incentive fees are useful marketing tools, since more new cash flows go into incentive-fee funds than into non-incentive-fee funds, ceteris paribus.

Document Type: Research article

DOI: 10.1111/1540-6261.00545

Affiliations: 1: New York University 2: Fordham University

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