Hostname: page-component-586b7cd67f-dsjbd Total loading time: 0 Render date: 2024-11-27T17:46:15.172Z Has data issue: false hasContentIssue false
  • English
  • Français

Capital Commitment and Performance: The Role of Mutual Fund Charges

Published online by Cambridge University Press:  02 November 2022

Juan-Pedro Gómez ,
Melissa Porras Prado  and
Rafael Zambrana Open the ORCID record for Rafael Zambrana [Opens in a new window]
Juan-Pedro Gómez
Affiliation:
IE University IE Business School [email protected]
Melissa Porras Prado
Affiliation:
Nova School of Business and Economics [email protected]
Rafael Zambrana*
Affiliation:
University of Notre Dame Mendoza College of Business
*
[email protected] (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We study how the scarcity of committed capital affects the equilibrium distribution of net alphas in the asset management industry. We propose a model of active portfolio management with different sales fee structures where committed capital is in short supply. In the model, a portfolio’s excess return is not fully appropriated by the money manager but shared with long-term investors. Empirically, we show that capital commitment allows funds to hold shares longer and take advantage of slow-moving arbitrage opportunities. Consistent with the model, funds with more committed capital generate higher value added, which, net of fees, accrues to long-term investors.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 2 , March 2024 , pp. 727 - 758
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

This work was funded by the Fundação para a Ciência e a Tecnologia (UID/ECO/00124/2019, UIDB/00124/2020, UIDP/00124/2020, and Social Sciences DataLab PINFRA/22209/2016), the POR Lisboa and POR Norte (Social Sciences DataLab PINFRA/22209/2016), the Spanish Ministry of Economy and Competitiveness (MCIU), the State Research Agency (AEI), and the European Regional Development Fund (ERDF) Grant Nos. PGC2018-101745-A-I00 and PID2021-125359NB-I00, and MCIN/AEI/10.13039/501100011033/FEDER (UE Grant No. PID2021-125359NB-I00). Gómez thanks the Bank of Spain for its generous support. Prado also acknowledges financial support from the NOVO BANCO Entrepreneurship & Technology Chair. We especially thank Tim Adam, Vikas Agarwal, Fernando Anjos, Guillermo Baquero, Gjergji Cici, Jennifer Conrad (the editor), Richard Evans, Miguel Ferreira, Alexander Kempf, Vikram Nanda, Giorgio Ottonello, Arthur Petit-Romec, Clemens Sialm, David Stolin, Neal Stoughton, Ran Xing (the referee), and Fernando Zapatero for their helpful comments. We also thank seminar participants at the 2019 Finance Forum at Carlos III University, the University of Houston, CFR Cologne University, the University of Arizona, the University of Texas at Dallas, the University of Virginia, ESMT Berlin, the 2019 Lubrafin Conference, the University of Texas at Austin, Nova SBE, the Skema Business School, the Universitat Illes Balears, the Hebrew University of Jerusalem, the Universidad Autónoma de Madrid, and VAMSS seminar series.

References

Agarwal, V.; Vashishtha, R.; and Venkatachalam, M.. “Mutual Fund Transparency and Corporate Myopia.” Review of Financial Studies, 31 (2018), 1966–2003.CrossRefGoogle Scholar
Amihud, Y., and Mendelson, H.. “Asset Pricing and the Bid–Ask Spread.” Journal of Financial Economics, 17 (1986), 223–249.CrossRefGoogle Scholar
Amihud, Y. “Illiquidity and Stock Returns: Cross-Section and Time-Series Effect.” Journal of Financial Markets, 5 (2002), 31–56.CrossRefGoogle Scholar
Berk, J. B., and Green, R. C.. “Mutual Fund Flows and Performance in Rational Markets.” Journal of Political Economy, 112 (2004), 1269–1295.CrossRefGoogle Scholar
Berk, J. B., and Van Binsbergen, J. H.. “Measuring Skill in the Mutual Fund Industry.” Journal of Financial Economics, 118 (2015), 1–20.CrossRefGoogle Scholar
Bolton, P., and Samama, F.. “Loyalty-Shares: Rewarding Long-Term Investors.” Journal of Applied Corporate Finance, 25 (2013), 86–97.CrossRefGoogle Scholar
Bushee, B. “Identifying and Attracting the “Right” Investors: Evidence on the Behavior of Institutional Investors.” Journal of Applied Corporate Finance, 16 (2004), 28–35.Google Scholar
Carhart, M. M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.CrossRefGoogle Scholar
Chalmers, J., and Reuter, J.. “Is Conflicted Investment Advice Better Than No Advice?” Journal of Financial Economics, 138 (2020), 366–387.CrossRefGoogle Scholar
Chan, L. K. C.; Lakonishok, J.; and Sougiannis, T.. “The Stock Market Valuation of Research and Development Expenditures.” Journal of Finance, 56 (2001), 2431–2456.CrossRefGoogle Scholar
Chatterjee, S., and Thyagaraju, A.. “Buy, Sell, Repeat! No Room for ‘Hold’ in Whipsawing Markets.” Reuters Business News (2020).Google Scholar
Chordia, T. “The Structure of Mutual Fund Charges.” Journal of Financial Economics, 41 (1996), 3–39.CrossRefGoogle Scholar
Christoffersen, S. E. K.; Evans, R.; and Musto, D. K.. “What Do Consumers’ Fund Flows Maximize? Evidence from Their Brokers’ Incentives.” Journal of Finance, 68 (2013), 201–235.CrossRefGoogle Scholar
Cohen, L.; Diether, K.; and Malloy, C.. “Misvaluing Innovation.” Review of Financial Studies, 26 (2013), 635–666.CrossRefGoogle Scholar
Cremers, M., and Pareek, A.. “Patient Capital Outperformance: The Investment Skill of High Active Share Managers Who Trade Infrequently.” Journal of Financial Economics, 122 (2016), 288–306.CrossRefGoogle Scholar
Del Guercio, D., and Reuter, J.. “Mutual Fund Performance and the Incentive to Generate Alpha.” Journal of Finance, 69 (2014), 1673–1704.CrossRefGoogle Scholar
Del Guercio, D.; Reuter, J.; and Tkac, P.. “Broker Incentives and Mutual Fund Market Segmentation.” NBER Working Paper No. 16312 (2010).CrossRefGoogle Scholar
Dow, J., and Gorton, G.. “Arbitrage Chains.” Journal of Finance, 49 (1994), 819–849.CrossRefGoogle Scholar
Eberhart, A. C.; Maxwell, W. F.; and Siddique, A. R.. “An Examination of Long-Term Abnormal Stock Returns and Operating Performance Following R&D Increases.” Journal of Finance, 59 (2004), 623–650.CrossRefGoogle Scholar
Edmans, A.; Gabaix, X.; Sadzik, T.; and Sannikov, Y.. “Dynamic CEO Compensation.” Journal of Finance, 67 (2012), 1603–1647.CrossRefGoogle Scholar
Evans, R. B. “Mutual Fund Incubation.” Journal of Finance, 65 (2010), 1581–1611.CrossRefGoogle Scholar
Evans, R. B., and Fahlenbrach, R.. “Institutional Investors and Mutual Fund Governance: Evidence from Retail–Institutional Fund Twins.” Review of Financial Studies, 25 (2012), 3530–3571.CrossRefGoogle Scholar
Fama, E., and French, K.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Giannetti, M., and Kahraman, B.. “Open-End Organizational Structures and Limits to Arbitrage.” The Review of Financial Studies, 31 (2018), 773–810.CrossRefGoogle Scholar
Goldman, E., and Slezak, S. L.. “Delegated Portfolio Management and Rational Prolonged Mispricing.” Journal of Finance, 58 (2003), 283–311.CrossRefGoogle Scholar
Hall, B. H.; Hall, R. E.; Heaton, J.; and Mankiw, N. G.. “The Value and Performance of U.S. Corporations.” Brookings Papers on Economic Activity, 1993 (1993), 1–49.CrossRefGoogle Scholar
Hirshleifer, D.; Hsu, P.-H.; and Li, D.. “Innovative Efficiency and Stock Returns.” Journal of Financial Economics, 107 (2013), 632–654.CrossRefGoogle Scholar
Jin, D.; Kacperczyk, M.; Kahraman, B.; and Suntheim, F.. “Swing Pricing and Fragility in Open-End Mutual Funds.” Review of Financial Studies, 35 (2022), 1–50.CrossRefGoogle Scholar
Johnson, T., W. “Predictable Investment Horizons and Wealth Transfers Among Mutual Fund Shareholders.” Journal of Finance, 59 (2004), 1979–2012.CrossRefGoogle Scholar
Lan, C.; Moneta, F.; and Wermers, R.. “Mutual Fund Investment Horizon and Performance.” CFR Working Papers 15-06, Centre for Financial Research (CFR), University of Cologne (2019).Google Scholar
Lauren, C., and Dong, L.. “Complicated Firms.” Journal of Financial Economics, 104 (2012), 383–400.Google Scholar
Lev, B., and Sougiannis, T.. “The Capitalization, Amortization, and Value-Relevance of R&D.” Journal of Accounting and Economics, 21 (1996), 107–138.CrossRefGoogle Scholar
Nanda, V.; Wang, Z. J.; and Zheng, L.. “The ABCs of Mutual Funds: On the Introduction of Multiple Share Classes.” Journal of Financial Intermediation, 18 (2009), 329–361.CrossRefGoogle Scholar
Porter, M. E. “Capital Choices: Changing the Way America Invests in Industry.” Journal of Applied Corporate Finance, 5 (1992), 4–16.CrossRefGoogle Scholar
Shleifer, A., and Vishny, R. W.. “Equilibrium Short Horizons of Investors and Firms.” American Economic Review Papers and Proceedings, 80 (1990), 148–153. Reprinted in Advances in Behavioral Finance, Thaler, R. H., ed. New York, NY: Russell Sage Foundation (1993).Google Scholar
Stein, J. C. “Why Are Most Funds Open-End? Competition and the Limits of Arbitrage.” Quarterly Journal of Economics, 120 (2005), 247–272.Google Scholar
Van Binsbergen, J. H.; Han, J.; Ruan, H.; and Xing, R.. “Mutual Fund Managers’ Career Concerns, Investment Horizons, and Value Added: Theory and Empirics.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3920863 (2021).Google Scholar
Van Binsbergen, J. H.; Han, J.; Ruan, H.; and Xing, R.. “A Horizon Based Decomposition of Mutual Fund Value Added Using Transactions.” Journal of Finance, forthcoming (2023).Google Scholar