Fund Flow and Risk Taking Based on Incentive Contract

Money managers are reward for increasing the value of assets under management. This gives the manager an implicit incentive to acquire money flow into the fund by manipulating her risk exposure. In this paper, we study the risk exposure features of a financial market in which fund managers who face asymmetric performance based fee. We show that the lager the degree of asymmetry of incentive contract, the higher the risk exposure. We also show that the lager the degree of asymmetry of fund-flows to relative performance, the less the risk exposure. The impacts of the degree of asymmetry of the incentive contract and that of money flow on the risk-taking behavior of the fund are opposite.