Strategic Asset Allocation in Money Management

Abstract

This paper analyzes the dynamic portfolio choice implications of strategic interaction among money managers who compete for fund flows. We study such interaction between two risk‐averse managers in continuous time, characterizing analytically their unique equilibrium investments. Driven by chasing and contrarian mechanisms when one is well ahead, they gamble in the opposite direction when their performance is close. We also examine multiple and mixed‐strategy equilibria. Equilibrium policy of each manager crucially depends on the opponent's risk attitude. Hence, client investors concerned about how a strategic manager may trade on their behalf should also learn competitors' characteristics.

Performance‐based Fee Contract and Risk‐taking Strategy in Asset Management Tournament

“…Our results above are consistent in several aspects with Basak and Makarov () who study strategic asset allocation in money management, though in quite different modelling setup. First, strategic interactions between money managers can generate pure‐strategy or mixed‐strategy equilibrium.…”

“…Second, a manager in a tournament is always influenced by tournament incentives, no matter whether she is leading or trailing (even by a wide margin). Third, Basak and Makarov () show that when their performances are close, money managers may gamble in opposite directions from each other. Similarly, Proposition above suggests that the leading manager at mid‐year may adopt a more aggressive investment strategy than the trailing manager.…”

The global financial crisis and the mutual fund flow–performance relationship

“…The first comprises the seminal work on investment performance management (Cowles, ) and other early studies (Jensen, ; Sharpe, ; Treynor, ) which follows the development of portfolio theory (Markowitz, ). The second includes studies that report evidence based on manager ability (Basak & Makarov, ; Fama, ; Henriksson & Merton, ; Lee & Rahman, ; Treynor & Mazuy, ), while the third comprises benchmark inefficiencies (Dybvig & Ross, ; Ferson & Schadt, ; Grinblatt & Titman, ). The fourth group presents evidence on fund characteristics (Carhart, ; Elton, Gruber, & Blake, ; Goetzmann & Ibbotson, ; Hendricks, Patel, & Zeckhauser, ) especially within the mutual fund flow–performance relationship (Gruber, ; Ippolito, ; Sirri & Tufano, ).…”

Market Structure and Heterogeneous Traders’ Strategies within an Environment of Information Asymmetry

“…Consequently, he shall discourage those who wish selling. Thus, after a brief time and a somewhat transactions, this agent can restore his expected position (Bazak & Makarov, 2014). Similarly, by means of the prices he quotes, if this operator has an excessive inventory compared to what he would like, he resorts to a reverse strategy which consists to reduce not only his bid price (buying with) but also his ask price (selling with).…”