The performance of Mutual Funds: a view on the costs and an empirical analysis of the incentive fees.

Funds have become an increasingly popular investment over the past few decades. They are an investment option that pools money from multiple investors to invest in a diversified portfolio of securities, such as stocks, bonds, and other assets. The diversification of the portfolio can help to reduce risk and provide investors with exposure to a broad range of assets Fund managers handle fund management roles by designing strategies that match with different end goals varying from growth, income, or capital preservation. There are different types of funds like mutual funds, hedge funds and ETF (Exchange traded funds) described in the first chapter. One of factors that impact the choose of a mutual fund are the costs associated. The aim of this thesis is to examinate in detail mutual funds commissions and their impact on the investment’s return, in particular the incentive fees. In the second chapter we will provide an analysis of the fees on funds, including their structure, the factors that impact them, and their impact on investor returns. There are different types of costs: asset-based fees and performance-based fees. The structure of incentive fees varies across funds and can be quite complex. After having explained the concept of incentive fees, we will explore the factors that impact incentive fees as the level of risk associated with the fund’s investment strategy and the competition among fund management companies. Funds with more complex investment strategies or high levels of risk may require more active management, which can result in higher incentive fees. Performance fees can also create misaligned incentives between fund managers and investors, as managers may be incentivized to take on excessive risk to achieve high levels of performances and earn higher fees. By providing an analysis of fees on funds, we will analyse the effect of performance fees on investor returns. The risk-adjusted performance of a portfolio is a widely used financial metric for evaluating the performance of an investment portfolio, considering both the return generated and the risk taken to achieve that return. By comparing the risk-adjusted performance of different investments, portfolio managers can assess the trade-off between return and risk and make investment decisions that are aligned with their investment objectives and risk tolerance. With multifactor models we consider various factors at the same time to explain asset returns to enhance risk-adjusted returns and achieve efficient portfolio returns. In the final chapter aims to evaluate whether Italian mutual funds that charge higher performance fees are able to generate superior returns compared to funds that do not charge this type of cost.