Strategic Asset Allocation in Money Management

Abstract

This article analyzes the dynamic portfolio choice implications of strategic interaction among money managers, arising as they compete for fund flows. We study such interaction between two risk-averse managers in continuous time, characterizing analytically their unique equilibrium investments. Driven by chasing and contrarian mechanisms when one is well ahead, they gamble in the opposite direction when their performances are close. We also discuss multiple and mixed-strategy equilibria. Equilibrium policy of each crucially depends on the opponent's risk attitude. Hence, client investors, concerned about how a strategic manager may trade on their behalf, should also learn competitors' characteristics.

Keywords: Money Managers, Strategic Interaction, Portfolio Choice, Relative Performance, Incentives, Risk Shifting, Fund Flows, Tournaments

JEL Classification: G11, G12, G20, D81, C72, C73, C61