The Efficiency of Performance-based-fee Funds

Resumen

This paper compares the performance of mutual funds which charge management fees total or partially on returns with those which charge management fees exclusively on assets under management. Despite the conclusions from agency theory, which advocates the use of performance-based management fees in order to mitigate the investor-manager agency problems, only a minority of mutual funds worldwide tie the managers� remuneration to the fund performance. In particular, we study mutual fund efficiency through the comparative analysis of the risk-adjusted measures and the performance-expenses relationship. We apply our study to a sample of Spanish mutual funds, from 1999 to 2009, where both type of management fees are authorized. In short, we find that funds with performance-based management fees perform significantly better than the other risky funds considered. Moreover, we have found a strong positive performance-expenses relationship for these funds and negative for the remaining. These results seem to point to more efficient management in the performance-based fees funds, contrasting with their low presence in the fund industry.