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Kubik article on outsourcing mutual fund management published in The Journal of Finance

Nov 25, 2012

Outsourcing Mutual Fund Management: Firm Boundaries, Incentives and Performance

Joseph Chen, Harrison G. Hong, Wenxi Jiang & Jeffrey D. Kubik

The Journal of Finance, November 2012

Jeffrey D. Kubik

Jeffrey D. Kubik

The authors investigate the effects of managerial outsourcing on the performance and incentives of mutual funds. Fund families outsource the management of a large fraction of their funds to advisory firms. These funds under-perform those ran internally by about 50 basis points per year. After instrumenting for a fund's outsourcing status, the estimate of under-performance is three times larger. The authors hypothesize that contractual externalities due to firm boundaries make it difficult to extract performance from an outsourced relationship. Consistent with this view, an outsourced fund faces higher-powered incentives; they are more likely to be closed after poor performance and excessive risk-taking.