If you are matching the index, then it cannot beat you. So, what does a fund manager typically do in this situation? They will often replicate the index. As long as you don’t screw things up by year-end, you are going to get a giant bonus. It’s June, and you are having a great year in terms of fund performance. Suppose you are in the opposite position to the fund manager above. ![]() But it happens, a lot, because of the compensation structure within the fund industry. How about going ‘all in’ on a sector in hopes of improving fund performance? For clients, none of this sounds good. If you are underweight golds, and they are running, how about loading up on the sector? How about taking a chance on a new IPO in the hopes that it pops and boosts performance. Would you not be at least tempted to increase the risk profile of your fund in order to get a giant bonus? If you like a stock, how about making it a 7 per cent weighting instead of 4 per cent. If you can catch, or beat, the index, your compensation rises dramatically. ![]() You have six months to boost the performance of your fund by the end of the year. Suppose you are having a tough performance year, and your fund is behind the market by 5 per cent. Suppose you are a fund manager making X per year in salary, but your annual bonus can be 3X or more. This advertisement has not loaded yet, but your article continues below.
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