Risk Lovers: Management Fee and Fund Performance

Abstract

We analyze the relationship between fund management fee rates and the risk-returns characteristics of funds to infer retail investors' risk preferences. Using data on open-end equity funds in China, we document a positive relationship between the fund management fee rate and the fund risk. This relationship cannot be explained by the return of those funds with high risks, since we find that funds with higher management fee rates normally have lower returns. We argue this is because of the mental accounting of households, and they become risk-loving when making fund investment decisions. They prefer funds with higher risk, and demand from them pushes up the management fee rate. Our results do not contradict existing findings since households could be risk-averse overall and risk-loving for certain investments.