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http://ssrn.com/abstract=887399
 
 

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Optimal Decentralized Investment Management


Jules H. Van Binsbergen


University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Michael W. Brandt


Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Ralph S. J. Koijen


London Business School - Department of Finance; National Bureau of Economic Research (NBER)

October 19, 2006

EFA 2006 Zurich Meetings
AFA 2007 Chicago Meetings Paper

Abstract:     
We study an institutional investment problem in which a centralized decision maker, the Chief Investment Officer (CIO), for example, employs multiple asset managers to implement and execute investment strategies in separate asset classes. The CIO allocates capital to the managers who, in turn, allocate these funds to the assets in their asset class. This two-step investment process causes several misalignments of objectives between the CIO and his managers and can lead to large utility costs on the part of the CIO. We focus on (i) loss of diversification, (ii) unobservable appetites for risk of the managers, and (iii) different investment horizons. We derive an optimal unconditional linear performance benchmark and show that this benchmark can be used to better align incentives within the firm. We find that the CIO's uncertainty about the managers' risk appetites increases both the costs of decentralized investment management and the value of an optimally designed benchmark.

Number of Pages in PDF File: 68

Keywords: Decentralized investment management, performance benchmark

JEL Classification: G0, G11, G23, G24

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Date posted: March 2, 2006  

Suggested Citation

van Binsbergen, Jules H. and Brandt, Michael W. and Koijen, Ralph S. J., Optimal Decentralized Investment Management (October 19, 2006). EFA 2006 Zurich Meetings; AFA 2007 Chicago Meetings Paper. Available at SSRN: http://ssrn.com/abstract=887399 or http://dx.doi.org/10.2139/ssrn.887399

Contact Information

Jules H. Van Binsbergen
University of Pennsylvania - The Wharton School ( email )
3641 Locust Walk
Philadelphia, PA 19104-6365
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
HOME PAGE: http://www.nber.org/people/jules_vanbinsbergen
Michael W. Brandt
Duke University - Fuqua School of Business ( email )
1 Towerview Drive
Durham, NC 27708-0120
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Ralph S. J. Koijen (Contact Author)
London Business School - Department of Finance ( email )
Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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