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Superior Information and Compensation Fees of Active Mutual Funds

We posit a fund manager and an individual investor who maximize the expected (log) utility of their respective terminal wealth. The manager possesses more information than the investor does and charges the latter, their would-be customer, a linear compensation fee. The investor will delegate their portfolio decisions to the manager if, and only if, the expected utility of their wealth after fees is larger than the expected utility they can achieve by directly investing in the market. Our framework, which uses a mathematical result by [Amendinger (2000)], allows us to characterize compensation fees in terms of information differential.