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Mutual Fund Incentive Fees: Determinants and Effects


  • The authors acknowledge the financial support of Carefin, Bocconi University for a related unpublished paper from which this work originates. Lazzari thanks the Cariplo Foundation for a grant supporting this work. The paper benefits from comments received by colleagues attending conferences where it was presented. Our largest debt, however, is to the two referees whose comments improved the paper immensely. Any remaining faults are exclusively ours.


We investigate the how and why of performance fee provisions in a free contracting environment such as the Italian mutual fund market until 2006. We find weak support for the hypothesis that these provisions emerge as an economically efficient solution in a rational asset management industry plagued by asymmetric information. They appear to emerge mainly as the product of strategic pricing by asset managers wishing to ease market competition, leverage on investors' sentiment, and hedge their cost structure. Alternatively, fears that managers may opportunistically alter funds' investment policies to maximize the option value embedded in the incentive provisions appear unjustified.