TY - JOUR
T1 - Reputation and performance fee effects on portfolio choice by investment advisers
AU - Huddart, Steven
N1 - Copyright:
Copyright 2018 Elsevier B.V., All rights reserved.
PY - 1999/8
Y1 - 1999/8
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.
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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 -