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Should fund managers have skin in the game?

Expert Investor

A manager’s personal capital investment is one factor the Swiss private bank considers when picking funds, but the key is, how much?

“There’s a balance to be struck,” he said. “If there is zero manager money in the fund, the fear is that there’s no duty of care. But if the manager puts in 100% of their liquid net worth, their emotions could take over.”

Having all the manager’s liquid net worth in the strategy could encourage them to run it with too little risk or could conversely be a sign of overconfidence, noted Goh. 

“If a manager says he puts 100% of his liquid net worth into the fund and it’s a high-octane macro leveraged strategy, then either he’s lying to you or he’s overconfident ,” he said.

“On average, we would like to see a PM put at most half their net worth into the fund – a meaningful amount, but not so much that it affects their judgement.

Those who over-invest in their own funds may be less able to take disinterested positions and may start internalising their own profit-and-loss, he added. 

Ultimately, he said, the size of a manager’s stake in a fund is one of the factors that helps corroborate their investment philosophy.

“Most of all, we want to understand the risk tolerance and mentality of the manager.”

Not only allocators, but research and rating firms such as Morningstar also notice skin in the game and cite it as a stronger incentive to deliver on performance.

The practice is widespread at larger institutional managers such as Pimco, said one source.

Allocators say it is useful for them to know where asset management executives are investing. “It’s reassuring to know that $100 million of a $2 billion strategy is coming from the firm’s employees,” said Goh.

Mutual fund PMs are less likely to have skin in the game than hedge fund and private equity managers, added Rodolphe Larqué, Asia-Pacific head of mutual funds and ETFs at Credit Suisse.

A related, more common and equally important incentive is linking a PM’s remuneration to the fund’s performance, he noted.

“This is definitively a plus when we select funds,” Larqué said.

Drew Wilson

Drew Wilson is editor of Fund Selector Asia. Previously he was editor at a publication covering private equity.

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