Implicit Incentives for Fund Managers with Partial Information

We study the optimal asset allocation problem for a fund manager whose compensation depends on the performance of her portfolio with respect to a benchmark. The objective of the manager is to maximise the expected utility of her final wealth. The manager observes the prices but not the values of the...

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Bibliographic Details
Published in:arXiv.org 2020-11
Main Authors: Angelini, Flavio, Colaneri, Katia, Herzel, Stefano, Nicolosi, Marco
Format: Article
Language:English
Subjects:
Expected utility
Incentives
Investment strategy
Market prices
Martingales
Optimization
Pricing
Online Access:Get full text
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Summary:We study the optimal asset allocation problem for a fund manager whose compensation depends on the performance of her portfolio with respect to a benchmark. The objective of the manager is to maximise the expected utility of her final wealth. The manager observes the prices but not the values of the market price of risk that drives the expected returns. The estimates of the market price of risk get more precise as more observations are available. We formulate the problem as an optimization under partial information. The particular structure of the incentives makes the objective function not concave. We solve the problem via the martingale method and, with a concavification procedure, we obtain the optimal wealth and the investment strategy. A numerical example shows the effect of learning on the optimal strategy.
ISSN:2331-8422