Managerial Ability, Risk Preferences and the Incentives for Active Management

Abstract

This paper uses a structural econometric model to assess the managerial ability of Spanish management companies. Traditionally, ability has been mainly measured by the alphas of CAPM models. The model used in this paper allows to disentangle the ability and preferences that are embedded in alphas. The results show that the abilities of Spanish management companies are lower than their peers in the US. This result could be the consequence of the limited competition in the mutual fund market as well as the narrowness of the equity markets that the funds invest in. Moreover, it is shown that the fraction of the funds' portfolios that is actively managed does not depend on the fees paid and it is negatively correlated to funds' total assets and whether a fund belongs to a credit institution's management company.