Redemption Fees: Reward for Punishment
Journal of Financial Services Providers, 2018 with Michael S. Finke and David Nanigian
- Awards:
- - 2008 Best Paper Award, Academy of Financial Services Annual Meeting
- Proceedings:
- - 2009 Financial Management Association Annual Meeting
- - 2008 Academy of Financial Services Annual Meeting
- Press Coverage:
- -"Funds Drop Redemption Fees as Market-Timing Fears Wane" by Maura McDermott, BoardIQ (5 July 2011)
- -"The Fee That Makes You Money" by Jeff Brown, Banking My Way
Short-term redemption fees have become increasingly prevalent amongst mutual funds. Mutual funds impose redemption fees with the intent of maximizing the wealth of mutual fund shareholders through discouraging them from engaging in frequent trading activity. This paper empirically analyzes if and how redemption fees achieve this goal. We find that mutual funds with redemption fees outperform their counterparts by 1.0 to 1.4 percent a year. Moreover, performance increases by 0.5 to 2.4 percentage points a year following the initiation of a redemption fee such that the difference in performance between the two groups of funds is indeed attributable to the fee. We find that the fee improves performance through changing portfolio characteristics. Most notably cash holdings decrease by 77 to 102 basis points after fee initiation.