Relative performance objectives in financial markets [An article from: Journal of Financial Intermediation]

This digital document is a journal article from Journal of Financial Intermediation, published by Elsevier in 2005. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

Description:
Money management is an activity in which agents are often evaluated on the basis of their relative performance. In this article, I consider an economy in which (i) investors use a relative performance rule to evaluate mutual fund managers and allocate money into funds, and (ii) fund managers receive an asset-based compensation. Such fund-picking rules and compensation schemes generate relative performance objectives for fund managers. I study the consequences of this for the mutual fund industry in terms of the number of competing funds and trading strategies. I show that, with respect to absolute performance maximization, relative performance objectives increase the riskiness of investment strategies and reduces the number of low-quality funds. Overall, relative performance objectives increase investors' expected return.