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The Dynamics of Portfolio Management Contracts

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Author Info
Heinkel, Robert
Stoughton, Neal M
Abstract

We consider the multiperiod relationship between a client and a portfolio manager and the resulting problem of motivating a manager of unknown ability to acquire valuable information. We explore the contractual forms and the optimal retention policy of the client and find that the optimal initial set of contracts features a smaller performance based fee component paid to the manager than in a first-best contract, and the contract choice elicits only partial information about the manager. As a result, ex post performance measurement is critical to future recontracting. In general, managers are retained only if the returns on their portfolio exceed the benchmark by an appropriate amount. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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Publisher Info
Article provided by Oxford University Press for Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 7 (1994)
Issue (Month): 2 ()
Pages: 351-87
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Handle: RePEc:oup:rfinst:v:7:y:1994:i:2:p:351-87

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  1. Juan-Pedro Gómez & Tridib Sharma, 2003. "Portfolio Delegation under Short-selling Constraints," Economics Working Papers 695, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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  2. Ping Hu & Jayant Kale & Ajay Subramanian, 2003. "Compensation, Career Concerns, and Relative Risk Choices by Mutual Fund Managers: Theory and Evidence," Levine's Bibliography 666156000000000349, UCLA Department of Economics. [Downloadable!]
  3. Chen, Zhaohui & Wilhelm Jr, William J, 2005. "The Industrial Organization of Financial Market Information Production," CEPR Discussion Papers 5314, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  4. Palomino, Frédéric & Prat, Andrea, 1999. "Risk Taking and Optimal Contracts for Money Managers," CEPR Discussion Papers 2066, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  5. Uday Rajan & Sanjay Srivastava, 2000. "Portfolio Delegation with Limited Liability," Econometric Society World Congress 2000 Contributed Papers 1503, Econometric Society. [Downloadable!]
  6. Juan Pedro Gomez, 2005. "Portfolio Delegation Under Short-Selling Constraints," Working Papers Economia wp05-07, Instituto de Empresa, Area of Economic Environment. [Downloadable!]
  7. Sanjiv Ranjan Das & Rangarajan K. Sundaram, 1998. "Fee Speech: Adverse Selection and the Regulation of Mutual Funds," NBER Working Papers 6644, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Alexander Gumbel, 1999. "Trading on Short-Term Information," OFRC Working Papers Series 1999fe10, Oxford Financial Research Centre. [Downloadable!]
  9. Lütje, Torben, 2004. "To Be Good or To Be Better: Asset Managers Attitudes Towards Herding," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-297, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
  10. Hans K. Hvide, 2000. "Tournament Rewards and Risk Taking," Econometric Society World Congress 2000 Contributed Papers 0163, Econometric Society. [Downloadable!]
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  11. Alexander Gümbel, 2001. "Emerging Markets and Entry by Actively Managed Funds," OFRC Working Papers Series 2001fe12, Oxford Financial Research Centre. [Downloadable!]
  12. Stoughton, Neal & Zechner, Josef, 1999. "Optimal Capital Allocation Using RAROC And EVA," CEPR Discussion Papers 2344, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  13. Zhiguo He & Wei Xiong, 2008. "Multi-market Delegated Asset Management," NBER Working Papers 14574, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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