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Delegated Portfolio Management, Optimal Fee Contracts, and Asset Prices

Author

Listed:
  • Yuki SATO

    (University of Lausanne and Swiss Finance Institute)

Abstract

This paper proposes a model of asset-market equilibrium with portfolio delegation and optimal fee contracts. Fund managers and investors strategically interact to determine funds' investment profiles, while they share portfolio risk through fee contracts. In equilibrium, their investment decisions, fee schedules, and stock prices feed back into one another. The model yields testable implications for the relations between stock returns, fund returns, fund fees, fund size, and investment strategies. As more investor capital is intermediated by funds, stocks' aggregate demand becomes less price-elastic, making the prices more volatile. Fund returns behave differently from market returns because funds use leverage counter-cyclically.

Suggested Citation

  • Yuki SATO, 2015. "Delegated Portfolio Management, Optimal Fee Contracts, and Asset Prices," Swiss Finance Institute Research Paper Series 15-06, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1506
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    File URL: http://ssrn.com/abstract=2568721
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    More about this item

    Keywords

    portfolio delegation; optimal fee; asset prices; price volatility; fund size; fund return;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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