The bonus packages awarded to fund managers can distort asset prices, according to a fresh piece of academic research.
The paper, written by a postgraduate student at the London Business School, Anton Lines, found evidence of fund managers altering their investment strategy when there is a rise in market volatility.
Mr Lines, who analysed asset prices against the strategies of funds between 1980 and 2014, found those who are paid bonuses often ended up shifting their portfolio stocks so they sit closer to the benchmark when the markets start to wobble.
When markets become steadier, however, he found evidence of fund managers shifting their portfolio weights away from their benchmarks.
This, he said, puts pricing pressure on stocks and could have unintended negative consequences on asset prices.
By comparison, fund groups without bonuses had no impact on asset prices.
In the paper, which questioned if institutional incentives distort asset prices, Mr Lines said: “The effects come into play precisely when market-wide uncertainty is rising and distortions are less tolerable, with implications for the real economy.”
He said it is “crucial” to understand the incentives of these institutions and the consequences of their behaviour.
These findings come after one of the most prominent names in fund management, Neil Woodford, decided to ditch staff bonuses, branding such regimes a "distraction".
Fund manager pay packets have come under increased scrutiny recently and earlier this year a report from PricewaterhouseCoopers said fund group's pay structures will have to adapt to the increased costs and pressure on fees.
Danny Cox, chartered financial planner at Hargreaves Lansdown, said: "In principle, incentivising fund managers to deliver good risk rated performance should be good for the investor, the manager and the group.
"There is a lot to be said for choosing managers who eat their own cooking and have skin in the game."
However, Mr Cox said performance bonuses often reward the manager over the investor, and argued there are few examples of structures which act well for both sides.
"Incentives drive behaviours and fund manager remuneration has to be structured to be to the advantage of the investor and not to their detriment."
katherine.denham@ft.com
