Fee Structure and Fund Manager's Optimal Selling Rule

Abstract

We investigate the impacts of fee structure on a typical on the fund manager's optimal selling price. The fee structure includes the self-investment ratio in the fund, management fee, incentive fee, and the high watermark. Based on the explicit solution of the optimal selling price, we find that the optimal selling price is negatively related to the self-investment ratio and management fee, and positively related to the incentive fee and high watermark. This conclusion inspires designing an incentive contract for the manager: the fund manager should be offered more incentive fee and higher watermark, lower management fee, and self-investment ratio, which will possibly improve the fund performance.