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RFS Advance Access originally published online on August 31, 2005
Review of Financial Studies 2005 18(4):1139-1169; doi:10.1093/rfs/hhi031
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© The Author 2005. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oupjournals.org

Fund Families as Delegated Monitors of Money Managers

Simon Gervais
Duke University

Anthony W. Lynch
New York University and NBER

David K. Musto
University of Pennsylvania

Address correspondence to Simon Gervais, Fuqua School of Business, Duke University, One Towerview Drive, Durham, NC 27708-0120, or e-mail: sgervais{at}duke.edu.

Because a money manager learns more about her skill from her management experience than outsiders can learn from her realized returns, she expects inefficiency in future contracts that condition exclusively on realized returns. A fund family that learns what the manager learns can reduce this inefficiency cost if the family is large enough. The family’s incentive is to retain any given manager regardless of her skill but, when the family has enough managers, it adds value by boosting the credibility of its retentions through the firing of others. As the number of managers grows, the efficiency loss goes to zero.


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