Heads We Win, Tails You Lose. Why Don't More Fund Managers Offer Symmetric Performance Fees?

Abstract

In this paper we use Monte Carlo simulation techniques to gauge the impact of three mutual fund fee structures on the utility of investors and fund managers: a fee fixed as a proportion of AUM; an asymmetric performance-based fee; and a symmetric performance-based fee. Our study identifies a clear 'incentive mismatch' between the best interests of investors and managers, more specifically, there is no single structure that simultaneously maximises both the investors’ and the managers’ utility. In fact, the results show that the most prevalent fee structure currently in the UK market (a fixed fee as a proportion of AUM) is generally the best structure for the manager and the worst for the investor! To verify the robustness of our results, we stress-test the model parameters, however, none of these model variations change the base results and our main conclusion. The results in this paper give rise to a natural question: Since investors would prefer symmetric performance-based fees, why don't more fund managers offer such fees?