Strategic Asset Allocation in Money Management

52 Pages Posted: 3 Feb 2009 Last revised: 31 May 2012

See all articles by Suleyman Basak

Suleyman Basak

London Business School; Centre for Economic Policy Research (CEPR)

Dmitry Makarov

ICEF, Higher School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 28, 2012

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

Suggested Citation

Basak, Suleyman and Makarov, Dmitry, Strategic Asset Allocation in Money Management (May 28, 2012). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1336546 or http://dx.doi.org/10.2139/ssrn.1336546

Suleyman Basak

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
44 (0)20 7000 8256 (Phone)
44 (0)20 7000 8201 (Fax)

HOME PAGE: http://www.suleymanbasak.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Dmitry Makarov (Contact Author)

ICEF, Higher School of Economics ( email )

26 Shabolovka
Moscow
Russia

HOME PAGE: http://www.nes.ru/~dmakarov

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