Question

Suppose that a fund manager runs an active fund with an expected return of 12% and standard deviation of 30%.

Given the performance metrics of the passive index, what is the maximum percentage fee the active fund manager could charge so that investors would be indifferent between investing in the active fund and investing in the passive index?

Does the fee the manager can charge depend on investors’ level of risk aversion?

Answer 1

the maximum fees which can be charged by the fund manager is based upon the excessive return he is going to produce over the market rate of return.

If he is having expected return of 12% along with standard deviation of 30%, the maximum fees, he can charge is 12(1+.3)

= 15.6%

Maximum fees active fund manager can charge is 15.6%.

yes, the charge of manager is dependent upon the risk aversion of various investors in the active fund because in active fund, only such investors are investing who have a high degree of risk appetite because active fund managers will always be taking higher risk than passive fund manager.