Fee Structures of Outsourced CIO and the Operational Efficiency

Sun-Joong Yoon (Dongguk University)
Sangki Lee (Soongsil University)

Journal of Derivatives and Quantitative Studies: 선물연구

ISSN: 1229-988X

Article publication date: 31 August 2019

Abstract

This study examines the problems associated with the management fee on outsourced CIOs in the public pension funds in Korea and proposes a better management fee structure. The main results of this study are summarized as follows. First, the outsourced CIO is likely to make a profit, provided that the management cost of the outsourced CIO is lower than a fixed ratio in a fee structure. Second, the profit margin of public funds increases as the fixed ratio decreases. Third, the outsourced CIOs can make a sure profit under the existence of the fixed fee only, regardless of the performance of public funds. In addition, the profit of outsourced CIOs increases as the level of delegation fees for sub-management firms decreases. However, such a fee structure may result in making worse the overall performance of funds ultimately. Fourth, it is necessary to introduce the performance-linked fee structure when the outsourced CIOs of public pension funds are selected. Such a fee structure can mitigate the possibility that the outsourced CIOs reassigns fund to sub-management firms with low management capacities, thereby lowering the fund’s overall performance.

Keywords

Citation

Yoon, S.-J. and Lee, S. (2019), "Fee Structures of Outsourced CIO and the Operational Efficiency", Journal of Derivatives and Quantitative Studies: 선물연구, Vol. 27 No. 3, pp. 275-296. https://doi.org/10.1108/JDQS-03-2019-B0002

Publisher

:

Emerald Publishing Limited

Copyright © 2019 Emerald Publishing Limited

License

This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode