The Agency Problems of Institutional Investors Flashcards
Bebchuk, Cohen, Hirst (2017)
What is the main idea?
There is not enough stewardship because for institutional investors it costs a lot to be active towards their portfolio.
How have institutional investors evolved?
Widely held corporations with dispersed ownership among small shareholders has been prevalent in the history, managers have all the control because ownership dispersion has led to a free-rider problem.
What impact holds aggregating the assets of investors?
Institutional investors hold substantial stakes in corporations to have a non-negligible effect when voting.
What are Types of Institutional Investors?
Index funds (Passive); Active funds (most of them are “closet indexers”); Hedge funds (very active).
What are stewardship activities?
Engagement with public companies, promoting corporate governance practices that encourage long-term value creation for shareholders.
Include voting and being informed in shareholder meetings; monitoring corporate managers; engaging with management (voice and exit).
What stewardship activities mean?
Mean more costs. Performance of these duties is under discretion of the investment manager. Can this person be considered to be reliable if they come from the management and not from an outside party?
Why index funds grow more popular?
Growing popularity of index funds is driven by their low costs, tax advantage and the evidence that they actually outperform actively managed funds.
What is Index fund agency problem that arises from costs and compensation?
Managers bear full costs of stewardship yet capture only a fraction (as low as 0.12%) of benefits created, because compensation is based on fixed % of assets under management. No incentive fees on the change of portfolio value.
What is index fund agency problem arising from index tracking?
- Relative to the index: if fund spends on stewardship and increases its value, this also increases the value of the tracked index, leaving performance relative to it unchanged)
- Relative to rivals (rivals following the same index experience the same % increase in value).
What does “closet indexers” mean for active funds?
Holdings highly overlap with the benchmark index, differing only by under- and over- weighting some stocks.
What is Active fund agency problem?
Private costs. Managers might be bearing additional private costs from taking positions that corporate managers disfavor.
What are the sources of Active Fund agency problem?
- Small monetary benefit from stewardship.
- Investing instewardship can reduce relative performance of the fund.
- Institutional investors want to keep good relationships with the managers because managers can in return provide more business.
Why hedge funds are more lenient to regulations?
They offer services to sophisticated investors.
What is typical hedge fund manager fee?
“2 and 20”: annual fee of 2% for assets under management; performance incentive of 20% from increase in value.
What are hedge fund limitations?
Managers spend on stewardship only when the resulting value increase are high enough to still give investors a reasonable return after higher fees is charged. Opportunities giving smaller returns are ignored.
