We develop a model of trading by an informed fund manager compensated on the basis of her fund's Net Asset Value (NAV). We show that she has an incentive to pump her portfolio by buying securities she already holds. Pumping leads to excessive trading and hurts long-term fund performance. It also biases upward measured NAVs and contributes to closed-end fund discounts. Despite such costs, it may still be optimal to base her compensation on NAV.
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Bhattacharyya et al. (2012) studied this question.
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