The lack of effective fund manager incentives is seen in Chinese capital markets, which lie at the core of the problem of fund performance. In addition to the governance structure of the defect, China current fund manager remuneration system is an important reason for the fund managers cannot maximize the interests of investors by the way to operate. China ‘Fund Law’ stipulates that the fund managers’ compensation, 1.5% annual rate by the end of the fund’s net asset value accrued management annual fee. However, in fact, the current stock fund management fee is 1.5% annual rate of extraction. Open-end funds have an additional subscription fee of about 1.5% and 0.5% redemption fee. If you count the one-year bank savings interest rates, the opportunity cost of investors to buy the fund is close to 5%. This means that the larger the fund, the more extracted management fees, fund manager’s income is higher. Therefore, this remuneration way does not clearly reflect fund manager’s investment management capabilities. The fund manager’s remuneration depends only on the size of the fund, even if profitability is low, even to fund investors caused a loss, managers can still shine mention management fee. In the case of such a lack of risk incentives, fund manager’s remuneration and risk liability asymmetry leading fund managers who lack motivation of profit.
Fund managers are the key persons in the operation of an investment fund. Recently, “herd behaviour” and “black screen” are frequent in the fund industry in China which indicate that there are loose systems of balance constrains and supervision. Therefore, it is important to apply an incentive mechanism to protect the interest of stakeholders, avoid “reversion choice” and “moral risk” among fund managers. We choose the incentive mechanism of fund managers as our research subject, which has great theoretical and practical significance.
Firstly, we carry on the theoretical analysis to the absolute performance incentive contract and the relative performance incentive contract. Secondly, we utilize the multi-dimensional linear regression models to study the incentive effect of fund management fee. Thirdly, we would analyze professional prestige of fund managers’ incentive effect using the Logistic regression models by establishing 0, 1 two classified variables. And finally, we study the fund managers’ risk choice by the relative performance sorting. According to the conclusions of theoretical and empirical analysis, we put forward the design and the consummation plans about the incentive mechanism of fund managers, and bring forward some suggestion to safeguard fund manager’s incentive mechanism to display useful effects.
Risk managed fund assets add to value just like other funds in capital market. Historically, they provide asymmetric returns and allow investors to a compounded capital at high rate of return. Equity risk is reduced, and provides high returns when controlling downside. This has also underpinned value added delivery of hedge funds as well. Usually when an investment is considered and track record reviewed, the analysis is made based upon net returns rather than gross of fees. Some of the best managers go as far as charging 3% management and 30% performance fees, yet they are also expected to compound annual returns to 10% net. Intermediaries firms that screen out managers based upon fee drag rather than focusing on the net return to investors also might miss out on expertise.