Discussion paper

DP12285 Impact of Managerial Commitment on Risk Taking with Dynamic Fund Flows

We present a model with dynamic investment flows, where fund managers have the ability to
generate excess returns and study how forcing them to commit part or all of their personal wealth
to the fund they manage affects fund risk taking. We contrast the behavior of a manager that
may invest her personal wealth in a private account to a manager that is either forced to commit
her wealth to the fund she manages, or a manager who is not allowed to hold risky assets held
by the fund privately. We show that a fund managed by a manager with higher ability does
not necessarily achieve higher expected returns but achieves lower idiosyncratic volatility. For a
manager with constant ability, restrictions placed on her personal account do not influence her
choices in the fund, while for a manager whose ability varies stochastically they result in higher
expected returns and idiosyncratic volatilities. Fund strategies can be non-monotone both in the
manager’s commitment level and the ratio of manager to investor wealth. Our results are robust
to incomplete information and to competing managers with correlated ability.


Kaniel, R (2017), “DP12285 Impact of Managerial Commitment on Risk Taking with Dynamic Fund Flows”, CEPR Press Discussion Paper No. 12285. https://cepr.org/publications/dp12285