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Strategic Asset Allocation under Peer Group Benchmarks

Author

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  • Sahuguet, Nicolas
  • Roche, Herve

Abstract

In the managed fund industry, compensation is performance-based and is evaluated with respect to a benchmark. The benchmarks can be an exogenous absolute index or the performance of comparable funds. We analyze the impact of a convex compensation scheme based on peer-group benchmarks. We develop a model of tournament between risk- averse fund managers who receive a fee proportionally to the return differential between their fund and the benchmark, provided that they beat the benchmark. We find that a more competitive benchmark leads to more risk-taking and more differentiated investment strategies. A more competitive (larger) industry provides similar incentives.

Suggested Citation

  • Sahuguet, Nicolas & Roche, Herve, 2022. "Strategic Asset Allocation under Peer Group Benchmarks," CEPR Discussion Papers 17042, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17042
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    More about this item

    Keywords

    Strategic portfolio allocation; Incentive fees; Managed fund industry; Tournaments; Peer-comparison benchmarks;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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