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We argued in our last “Research in Finance” page that the Architecture of the Asset Management Industry cannot be understood with standard rationality assumptions in Economics. We pointed out that there exists a negative relationship between fees and abnormal performance measured by residual alpha from the Carhart 4-factor model.
In a rational neoclassical equilibrium expected alphas of investment funds should be equalized with fees so that after fee performance is equalized. Strangely, a negative relationship between fund alphas and fund fees are observed, meaning that investment funds with lower fees have higher alphas. In principle, alpha is supposed to measure skills and the value added of asset managers and this leads to a situation where the less skilled funds...
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