Where fear of operator diversion constrains funding, enforceable investor rights to authorize consequential treasury commitments and replace the operator can increase willingness to commit capital to an agent-managed fund, relative to an otherwise comparable discretionary fund, when the reduction in expected agency losses exceeds the added governance and execution costs.

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Unfortunately, in such a case it may be impossible to sustain the efficient outcome where all funds remain closed-end. Any one high-ability manager will have an incentive to deviate, and set his fund up with an open-end charter, because this will signal his quality and thereby allow him to get more assets under management. This "businessstealing" effect sets off a counterproductive race to be open-ended, with both high-quality and low-quality managers ultimately being forced to open-end in order not to lose their investors. In the resulting equilibrium, all funds are open-end, yet there is no net benefit in terms of the quality of the managerial pool, since no low-ability managers get screened out. For some parameter values, the all-closed-end scenario can be Pareto-dominant, yielding higher returns to both investors and fund managers. But unlike the all-open-end configuration, it is not a stable equilibrium outcome.