Abstract
This paper examines a two-period model of investment management. Investors reallocate their wealth between two mutual funds managed by different investment advisers after observing the performance of each adviser in the first period. A reputation effect causes one adviser to choose a portfolio in the first period that is extreme given his private information about asset returns. Extreme portfolios are costly for risk-averse advisers and investors because mutual funds are riskier than in one-period or single-adviser settings. Adoption of a performance fee mitigates undesirable reputation effects and results in superior ex ante payoffs to investors.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 227-271 |
| Number of pages | 45 |
| Journal | Journal of Financial Markets |
| Volume | 2 |
| Issue number | 3 |
| DOIs | |
| State | Published - Jan 1 1999 |
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All Science Journal Classification (ASJC) codes
- Finance
- Economics and Econometrics
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Reputation and performance fee effects on portfolio choice by investment advisers. / Huddart, Steven J.
In: Journal of Financial Markets, Vol. 2, No. 3, 01.01.1999, p. 227-271.Research output: Contribution to journal › Article
TY - JOUR
T1 - Reputation and performance fee effects on portfolio choice by investment advisers
AU - Huddart, Steven J.
PY - 1999/1/1
Y1 - 1999/1/1
N2 - This paper examines a two-period model of investment management. Investors reallocate their wealth between two mutual funds managed by different investment advisers after observing the performance of each adviser in the first period. A reputation effect causes one adviser to choose a portfolio in the first period that is extreme given his private information about asset returns. Extreme portfolios are costly for risk-averse advisers and investors because mutual funds are riskier than in one-period or single-adviser settings. Adoption of a performance fee mitigates undesirable reputation effects and results in superior ex ante payoffs to investors.
AB - This paper examines a two-period model of investment management. Investors reallocate their wealth between two mutual funds managed by different investment advisers after observing the performance of each adviser in the first period. A reputation effect causes one adviser to choose a portfolio in the first period that is extreme given his private information about asset returns. Extreme portfolios are costly for risk-averse advisers and investors because mutual funds are riskier than in one-period or single-adviser settings. Adoption of a performance fee mitigates undesirable reputation effects and results in superior ex ante payoffs to investors.
UR - http://www.scopus.com/inward/record.url?scp=0033176854&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=0033176854&partnerID=8YFLogxK
U2 - 10.1016/S1386-4181(98)00013-5
DO - 10.1016/S1386-4181(98)00013-5
M3 - Article
AN - SCOPUS:0033176854
VL - 2
SP - 227
EP - 271
JO - Journal of Financial Markets
JF - Journal of Financial Markets
SN - 1386-4181
IS - 3
ER -