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research article

Mutual fund portfolio choice in the presence of dynamic flows

Hugonnier, Julien  
•
Kaniel, Ron
2010
Mathematical Finance

We analyze the implications of dynamic flows on a mutual fund's portfolio decisions. In our model, myopic investors dynamically allocate capital between a riskless asset and an actively managed fund which charges fraction-of-fund fees. The presence of dynamic flows induces "flow hedging" portfolio distortions on the part of the fund, even though investors are myopic. Our model predicts a positive relationship between a fund's proportional fee rate and its volatility. This is a consequence of higher-fee funds holding more extreme equity positions. Although both the fund portfolio and investors' trading strategies depend on the proportional fee rate, the equilibrium value functions do not. Finally, we show that our results hold even if investors are allowed to directly trade some of the risky securities.

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  • Metrics
Type
research article
DOI
10.1111/j.1467-9965.2010.00395.x
Web of Science ID

WOS:000275922200002

Author(s)
Hugonnier, Julien  
Kaniel, Ron
Date Issued

2010

Published in
Mathematical Finance
Volume

20

Issue

2

Start page

187

End page

227

Subjects

mutual funds

•

delegated portfolio management

•

incomplete markets

•

continuous time stochastic game

•

BSDEs

•

Management Contracts

•

Utility Maximization

•

Costly Information

•

Performance

•

Markets

•

Returns

•

Compensation

•

Incentives

•

Efficiency

Editorial or Peer reviewed

REVIEWED

Written at

EPFL

EPFL units
SFI-JH  
Available on Infoscience
October 12, 2009
Use this identifier to reference this record
https://infoscience.epfl.ch/handle/20.500.14299/43624
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