Demand Curves and the Pricing of Money Management

TLDR

Funds set different prices because they face varying demand curves, with asset retention causing performance‑sensitive investors to shift from poorer to better prospects, carrying their sensitivity. We find that past attrition strongly influences current pricing of retail funds but not institutional ones, and that the repricing of retail funds after new shareholders merge is predicted by the estimated change in their demand curve, a result robust to asset and account‑size effects.

Abstract

One reason why funds charge different prices to their investors is that they face different demand curves. One source of differentiation is asset retention: Performance-sensitive investors migrate from worse to better prospects, taking their performance sensitivity with them. In the cross-section we show that past attrition significantly influences the current pricing of retail but not institutional funds. In time-series we show that the repricing of retail funds after merging in new shareholders is predicted by the estimated effect on its demand curve. This result is robust to other influences on repricing, including asset and account-size changes.