ABSTRACT
Most mutual fund managers have performanceâbased contracts. Our theory predicts that mutual fund managers with asymmetric contracts and midâyear performance close to their announced benchmark increase their portfolio risk in the second part of the year. As predicted by our theory, performance deviation from the benchmark decreases riskâshifting only for managers with performance contracts. Deviation from the benchmark dominates incentives from the flowâperformance relation, suggesting that riskâshifting is motivated more by management contracts than by a tournament to capture flows.