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Greed can be dangerous to your Sharpe

Author

Listed:
  • Bernd Scherer

    (FTC Capital GmbH)

Abstract

Pricing is one of the most delicate decisions in any product offering. We show that a frequent resetting of funds high watermark leads to a sharp drop of risk-adjusted outperformance. In contrast, asset management companies opting in favour of less frequent adjustments to their high watermark effectively release past accumulated profits into loss-making days thereby reducing after fee volatility with a much more modest reduction in SHARPE ratio. Greed is not always good.

Suggested Citation

  • Bernd Scherer, 2012. "Greed can be dangerous to your Sharpe," Journal of Asset Management, Palgrave Macmillan, vol. 13(6), pages 369-372, December.
    • Handle: RePEc:pal:assmgt:v:13:y:2012:i:6:d:10.1057_jam.2012.22
    DOI: 10.1057/jam.2012.22
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    References listed on IDEAS

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    3. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
    4. Brown, Keith C & Harlow, W V & Starks, Laura T, 1996. "Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 51(1), pages 85-110, March.
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