Incentive Fees and Mutual Funds

Abstract

The purpose of this article is to examine the impact of incentive fees on mutual fund performance. The paper proceeds as follows. In the first section we examine the characteristics and the use of incentive fees in the mutual fund industry. In the second section we explore the theory of the effect of incentive fees on manager behavior. In the third section we discuss our data. In the fourth section we examine empirical results concerning fees earned, risk-adjusted performance, the effect of incentive fees on risk, and new cash flows into funds using incentive fees.