68 Pages Posted: 12 Aug 2015 Last revised: 5 Sep 2016
Date Written: September 2016
We consider a model where investors can invest directly or search for an asset manager, information about assets is costly, and managers charge an endogenous fee. The efficiency of asset prices is linked to the efficiency of the asset management market: if investors can find managers more easily, more money is allocated to active management, fees are lower, and asset prices are more efficient. Informed managers outperform after fees, uninformed managers underperform after fees, and the net performance of the average manager depends on the number of "noise allocators." Small investors should be passive, but large and sophisticated investors benefit from searching for informed active managers since their search cost is low relative to capital. Hence, managers with larger and more sophisticated investors are expected to outperform.
Keywords: Asset management, investment, information, search, efficiency, asset pricing, liquidity
JEL Classification: G1, G11, G12, G14, G2, G23, G24
Suggested Citation: Suggested Citation
Garleanu, Nicolae and Pedersen, Lasse Heje, Efficiently Inefficient Markets for Assets and Asset Management (September 2016). Available at SSRN: https://ssrn.com/abstract=2641770 or http://dx.doi.org/10.2139/ssrn.2641770