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Centralized versus Decentralized Delegated Portfolio Management under Moral Hazard Job Market Paper
| Content Provider | Semantic Scholar |
|---|---|
| Author | Leung, Raymond |
| Copyright Year | 2015 |
| Abstract | If an investor wants to invest into two asset classes, should he delegate to a single portfolio manager to manage both asset classes (centralized delegation)? Or should he delegate to two managers, each of whom exclusively manages one asset class (decentralized delegation)? Optimal risk sharing and portfolio choice discretion delineate the difference between centralization versus decentralization. Asset classes whose returns are negatively correlated and have high volatilities will favor centralization. But if the two asset classes have very different mean returns, this disfavors centralization: the single manager may disregard portfolios implementing the investor’s desired investments and prefer portfolios in alternative investments. Thus, the investor must pay the single manager high performance fees to disincentivize deviation. Decentralization eliminates this necessity because one manager cannot trade another manager’s asset class, and the investor contracts with each manager individually. But in decentralization, it may be impossible to implement the investor’s desired investments because managers deviate without considering the correlation between the managers’ returns. This last problem can be resolved in a dynamic setting, in which the investor’s wealth “intertemporally glues” together the managers’ wealths to provide the correct incentives. |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | http://faculty.haas.berkeley.edu/r_leung/leung_jmp_decvscen_portmgt_maintext.pdf |
| Language | English |
| Access Restriction | Open |
| Content Type | Text |
| Resource Type | Article |
