CHAPTER 13 The Effect of Management and Incentive Fees on the Performance of CTAs: A Note. This chapter examines the effect of management and incentive fees on the performance and volatility of CTA track records. | 13 The Effect of Management and Incentive Fees on the Performance of CTAs A Note Fernando Diz This chapter examines the effect of management and incentive fees on the performance and volatility of CTA track records. Evidence of a structural change in incentive compensation is presented that points to a larger reliance on incentive fees as opposed to management fees. Management fees have no relationship to performance. No systematic performance or volatility penalty is suffered by investors by this type of compensation. Incentive fees are found to be positively related to both net of fees returns and volatility. An increase in the incentive fee parameter from 10 percent to 20 percent will increase performance by an average of percent per year. The performance increase is net of the effects of leverage and other variables affecting performance. There is also a small tendency for CTAs with larger amounts of assets under management to have slightly better performance. INTRODUCTION This chapter empirically examines the effect of incentive compensation contracts of commodity trading advisors CTAs on their performance. The analysis is an extension of Golec 1993 and examines the effects of incentive compensation contracts on the risk and return of CTAs. The contribution of this chapter is twofold. In Golec the sample used was too small to Partial support for the completion of this study was provided by a grant from the Foundation for Managed Derivatives Research. The author wishes to thank the Foundation for its support and Sol Waksman for his invaluable comments. 248 The Effect of Management and Incentive Fees on the Performance of CTAs 249 draw reliable inferences about the effect of incentive compensation on the risk and return of CTAs. Current events in the money management world associated with manager compensation abuses have heightened the importance of measuring the effects of compensation more accurately. A much larger database than the one used in Golec .
