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Emerging Markets and Entry by Actively Managed Funds

Alexander Gümbel


This paper investigates the incentives of investors to set up an actively managed fund in an emerging market or asset class. The analysis highlights the role of agency problems between fund managers and investors in determining this entry decision. It is shown that investors may wish to set up a fund in a new market, only when another fund is also active in that market. Fund entry into a new market can therefore be subject to a co-ordination problem, which may result in no entry of funds. This problem is acute when fund managers have little information about underlying asset values. Equilibrium wage contracts for managers are derived for the case when one or two managers are active in a market. It is shown that wage contracts induce (i) overly aggressive trading by managers when two funds are active in a market, and (ii) insufficiently aggressive trading when only one manager is active. The evidence of country fund inception for emerging markets is reviewed in light of this analysis and policy implications are presented.

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