Optimal Fund Menus

77 Pages Posted: 12 Jul 2018 Last revised: 13 Aug 2018

See all articles by Jaksa Cvitanic

Jaksa Cvitanic

California Institute of Technology - Division of the Humanities and Social Sciences

Julien Hugonnier

Swiss Federal Institute of Technology Lausanne - Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Date Written: June 29, 2018

Abstract

We study the optimal design of a menu of funds by a manager who is required to use linear pricing and does not observe the preferences of investors regarding one of the risky assets. The optimal menu involves bundling of assets and can be explicitly constructed from the solution to a calculus of variations problem that optimizes over the indirect utility that each type of investor receives. We provide a complete characterization of the optimal fund menu and show that the need to maintain incentive compatibility leads the manager to behave as a closet indexer by offering funds that are inefficiently tilted towards the asset which is not subject to the information friction.

Keywords: Mutual fund menus, screening, linear pricing, closet indexing

JEL Classification: C62, C71, D42, D82, G11

Suggested Citation

Cvitanic, Jaksa and Hugonnier, Julien, Optimal Fund Menus (June 29, 2018). Swiss Finance Institute Research Paper No. 18-47. Available at SSRN: https://ssrn.com/abstract=3205206 or http://dx.doi.org/10.2139/ssrn.3205206

Jaksa Cvitanic

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
Pasadena, CA 91125
United States

HOME PAGE: http://www.hss.caltech.edu/~cvitanic/

Julien Hugonnier (Contact Author)

Swiss Federal Institute of Technology Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL Dorigny
Extranef
Lausanne, CH-1015
Switzerland

HOME PAGE: http://sfi.epfl.ch/hugonnier

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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