The Industrial Organization of Money Management
28 Pages Posted: 17 Mar 2012
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: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Testing the Sorting Model of Education
By Andrew Weiss
-
The Role of Credentials in the Canadian Labour Market
By Ana M. Ferrer and W. Craig Riddell
-
Factors Affecting the Output and Quit Propensities of Production Workers
By Roger Klein, Richard H. Spady, ...
-
Correcting for Truncation Bias Caused by a Latent Truncation Variable
-
Education, Credentials, and Immigrant Earnings
By Ana M. Ferrer and W. Craig Riddell
-
High School Graduation, Performance and Earnings
By Andrew Weiss
-
Art Experts and Auctions: Are Pre-Sale Estimates Unbiased and Fully Informative?
By Luc Bauwens and Victor A. Ginsburgh