{"title":"Fee structure and equity fund manager’s optimal locking in profits strategy","authors":"","doi":"10.1016/j.irfa.2024.103611","DOIUrl":null,"url":null,"abstract":"<div><div>We study the effects of fee structures on fund managers’ strategies for locking in profits. Utilizing the optimal stopping time method, we identify two critical portfolio value thresholds that signal when a manager will choose to lock in profits. Fee components such as management fees, self-investment ratios, and high-water marks significantly influence these decisions. Specifically, higher management fees are associated with increased risk aversion, leading to a narrower continuation region, indicating a preference for lower risk. Conversely, performance fees encourage greater risk-taking. We use the S&P 500 Index and NASDAQ Composite index as representatives of managers’ portfolios and apply our model to illustrate how managers adjust their profit-locking strategies in response to their desired rewards.</div></div>","PeriodicalId":48226,"journal":{"name":"International Review of Financial Analysis","volume":null,"pages":null},"PeriodicalIF":7.5000,"publicationDate":"2024-09-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"International Review of Financial Analysis","FirstCategoryId":"96","ListUrlMain":"https://www.sciencedirect.com/science/article/pii/S105752192400543X","RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0
Abstract
We study the effects of fee structures on fund managers’ strategies for locking in profits. Utilizing the optimal stopping time method, we identify two critical portfolio value thresholds that signal when a manager will choose to lock in profits. Fee components such as management fees, self-investment ratios, and high-water marks significantly influence these decisions. Specifically, higher management fees are associated with increased risk aversion, leading to a narrower continuation region, indicating a preference for lower risk. Conversely, performance fees encourage greater risk-taking. We use the S&P 500 Index and NASDAQ Composite index as representatives of managers’ portfolios and apply our model to illustrate how managers adjust their profit-locking strategies in response to their desired rewards.
期刊介绍:
The International Review of Financial Analysis (IRFA) is an impartial refereed journal designed to serve as a platform for high-quality financial research. It welcomes a diverse range of financial research topics and maintains an unbiased selection process. While not limited to U.S.-centric subjects, IRFA, as its title suggests, is open to valuable research contributions from around the world.