PERFORMANCE-BASED FEE CONTRACT AND RISK-TAKING STRATEGY IN ASSET MANAGEMENT TOURNAMENT

摘要

This paper investigates how performance-based fee (PBF) contracts affect strategic risk-taking behaviours of fund managers in an asset management tournament. In the perfect equilibrium, managers with better mid-year performance will hold the risky asset with a higher probability in the remaining of the year, compared to managers with poorer mid-year performance. If the volume of the cash flow into the winner fund is contingent on its level of success, the winning fund will take a more aggressive approach. When the PBF contract pays more heed to relative performance against the benchmark, managers are more likely to adopt aggressive strategies.