The Industrial Organization of Money Management

28 Pages Posted: 17 Mar 2012

See all articles by Simon Gervais

Simon Gervais

Duke University - Fuqua School of Business; Duke Innovation & Entrepreneurship Initiative

Günter Strobl

University of Vienna - Department of Finance

Date Written: March 15, 2012

Abstract

We construct and analyze a model of delegated portfolio management in which money managers signal their investment skills via their choice of transparency for their fund. We show that a natural equilibrium is one in which high- and low-skill managers pool in opaque funds, while medium-skill managers separate in transparent funds. In this equilibrium, high-skill managers rely on their eventual performance to separate from low-skill managers over time, saving the monitoring costs associated with transparency. In contrast, medium-skill managers rely on transparency to separate from low-skill managers, especially when it is difficult for investors to tell them apart through performance alone. Low-skill managers prefer mimicking high-skill managers in opaque funds in the hope of replicating their performance and compensation. The model yields several novel empirical predictions that contrast transparent funds (e.g., mutual funds) and opaque funds (e.g., hedge funds).

Suggested Citation

Gervais, Simon and Strobl, Günter, The Industrial Organization of Money Management (March 15, 2012). Available at SSRN: https://ssrn.com/abstract=2023884 or http://dx.doi.org/10.2139/ssrn.2023884

Simon Gervais

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Box 90120
Durham, NC 27708-0120
United States
919-660-7683 (Phone)
919-883-5078 (Fax)

HOME PAGE: http://www.fuqua.duke.edu/faculty_research/faculty_directory/gervais/

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

Günter Strobl (Contact Author)

University of Vienna - Department of Finance ( email )

Oskar-Morgenstern-Platz 1
Vienna, 1090
Austria

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