Abstract
Performance ranking is a key factor for investors to make investment decisions such as redemption. Numerous studies have shown that in order to improve and secure the year-end relative performance ranking, mid-year performance rankings have prompted fund managers ranked at different mid-year levels to adjust the risk levels of their portfolios to varying degrees in the second half of the year. This study is of great significance to improve the incentive mechanism of fund companies, investor investment activities and the performance of regulatory responsibilities by state institutions. First of all, this paper makes a full sample study of the risk adjustment behavior of fund manager based on the fund’s first-half performance by using the combination table analysis method and regression analysis method, and further studies the relationship between market state and fund manager’s risk adjustment behavior. Result: Fund managers (losers) with lower mid-year performance increase portfolio risk more than fund managers (winners) who are at the top of the mid-year performance list. Finally, pay incentives dominate in a bull market, prompting fund managers to increase the risk of their portfolios in the second half of the year in the event of a lower first-half performance ranking, while career worries can have the opposite effect of performance rankings in a bear market.
Highlights
The tournament mechanism is an incentive mechanism for the fund industry
Result: Fund managers with lower mid-year performance increase portfolio risk more than fund managers who are at the top of the mid-year performance list
Pay incentives dominate in a bull market, prompting fund managers to increase the risk of their portfolios in the second half of the year in the event of a lower first-half performance ranking, while career worries can have the opposite effect of performance rankings in a bear market
Summary
The tournament mechanism is an incentive mechanism for the fund industry. Fund managers strive to increase their relative performance rankings in order to expand their size, and engage in a fierce performance competition. Relative performance rankings motivate managers to work harder (Lazear and Rosen (1981)) [2]. Such incentives may lead to excessive risk of increasing performance rankings (Taylor (2003)) [3]
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