Are fund managers rewarded for taking cyclical risks?

Arbeitspapier

The investment fund sector has expanded dramatically since the crisis of 2008-2009. As the sector grows, so do the implications of its risk-taking for the wider financial system and real economy. This paper provides empirical evidence for the existence of wide- spread risk-taking incentives in the investment fund sector, with a particular focus on incentives for synchronised, cyclical risk-taking which could have systemic effects. Incentives arise from the positive response of investors to returns achieved through cyclical risk-taking and non-linearities in the relationship between fund returns and fund flows, which may keep managers from fully internalising the effects of adverse outcomes on their portfolios. The fact that market discipline may not be sufficient to ensure prudential behaviour among managers, combined with the externalities of this risk-taking for the wider system, creates a clear case for macroprudential regulatory intervention.

Object Details

• ISBN: 978-92-9472-256-0
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ESRB Working Paper Series ; No. 134

Classification and Topics

• Classification: Wirtschaft ; Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors ; Portfolio Choice; Investment Decisions ; Financial Institutions and Services: Government Policy and Regulation
• Subject: Financial stability ; investment funds ; incentive ; risk-taking ; macroprudential policy

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Ryan, Ellen
• Event: Veröffentlichung
• (who): European Systemic Risk Board (ESRB), European System of Financial Supervision
• (where): Frankfurt a. M.
• (when): 2022

Further information

• DOI: doi:10.2849/894844
• Handle: http://hdl.handle.net/10419/265235
• Last update: 10.03.2025, 11:42 AM CET