Open The Trust Investment Fund Manager's Incentive Problems Explored

In2007, the subprime mortgage crisis broke out in America and quickly affected its financial and economic stability. The subprime mortgage crisis in the United States led to the global financial turmoil. In China, the investors hoped to achieve preservation and appreciation of the capital with investment trusts which has the functions of financial expert and risk diversification. In this financial turmoil, the investment trusts didn’t exhibit their own advantages, which led to serious loss of investor capital. However, the fund company still got a huge profit, which caused the dissatisfaction of investors. In accordance with the provisions of the Fund Law, the fund managers extract annual management fee of1.5%of the fund’s net asset value. The lack of risk incentive and loss compensation mechanism makes the return and risk liability of fund managers asymmetric. Risk and reward are not related leads to the lack of earnings momentum of fund managers.This paper hopes to achieve the goal of revenue and risk sharing between fund managers and investors by explicit and implicit incentives for fund managers with principal-agent theory, portfolio theory and portfolio theory and so on.First, this paper studies explicit incentive for fund managers. It studies the action of the linear contract on fund managers’behavior in the view of theory. Considering the choice of effort and risk of manager, this paper gives an information structure explanation for the return of portfolio by manager’s influence using Information Economics. The paper discusses the function of benchmark writing into contract and finds that this way can play a role of incentive and enhance the understanding of investors to managers. The paper studies the influence of symmetrical and incentive fee structure on the risk taking of manager. Assume that the manager has the same risk aversion of the two fee structure, under the case of symmetrical fee structure, the risk taking of manager is restricted by the preference of manager and investor and market condition and the risk taking of manager under the case incentive fee structure is more than under the case of symmetrical fee structure.Secondly, this paper studies implicit incentive for fund managers, which is considered from the aspects of excess return, selectivity ability and timing ability of fund manager. This paper measures the ability of excess return by Treynor index, Sharpe index and Jensen alpha index. Furthermore, using the data of open-end funds from2006to2010to verify, and we have been consistent with the actual conclusion. The paper uses the classic models such as Treynor-Mazuy and Henriksson-Merton model to measure selectivity ability and timing ability of fund manager and also verify them. And it also introduces the popular method Characteristic Selectivity model which is often used to verity the selectivity ability. Furthermore, this paper uses the K-means algorithm to improve the CS model because of its instability and acquire the new empirical results of open-end fund managers with data from2001to2011.