Paying for Beta: Leverage Demand and Asset Management Fees

We examine how investor demand for leverage shapes asset management fees. In our model, investors' leverage demand generates a cross-section of positive fees even if all managers produce zero risk-adjusted returns. We find support for the model's novel predictions in the sample of the U.S. equity mutual funds: (1) fees increase in fund market beta precisely for beta larger than one; (2) this relation becomes stronger when leverage constraints tighten; and (3) low net alphas are especially common among high-beta funds. These results suggest that asset managers can earn fees above their risk-adjusted returns for providing their investors with leverage.