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Fund Families as Delegated Monitors of Money Managers

Simon Gervais1; Anthony W. Lynch2; David K. Musto3

1 Duke University · 2 New York University · 3 California University of Pennsylvania

Review of Financial Studies 2005

Because a money manager learns more about her skill from her management experience than outsiders can learn from her realized returns, she expects inefficiency in future contracts that condition exclusively on realized returns. A fund family that learns what the manager learns can reduce this inefficiency cost if the family is large enough. The family's incentive is to retain any given manager regardless of her skill but, when the family has enough managers, it adds value by boosting the credibility of its retentions through the firing of others. As the number of managers grows, the efficiency loss goes to zero. Copyright 2005, Oxford University Press.

DOI
10.1093/rfs/hhi031
Volume
18 (4)
Pages
1139-1169
Language
en
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