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Delegated Asset Management, Investment Mandates, and Capital Immobility

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  • Zhiguo He
  • Wei Xiong

Abstract

This paper develops a model to explain the widely used investment mandates in the institutional asset management industry based on two insights: First, giving a manager more investment flexibility weakens the link between fund performance and his effort in the designated market, and thus increases agency cost. Second, the presence of outside assets with negatively skewed returns can further increase the agency cost if the manager is incentivized to pursue outside opportunities. These effects motivate narrow mandates and tight tracking error constraints to most fund managers except those with exceptional talents. Our model sheds light on capital immobility and market segmentation that are widely observed in financial markets, and highlights important effects of negatively skewed risk on institutional incentive structures.

Suggested Citation

  • Zhiguo He & Wei Xiong, 2008. "Delegated Asset Management, Investment Mandates, and Capital Immobility," NBER Working Papers 14574, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:14574
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    References listed on IDEAS

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    Cited by:

    1. Acharya, Viral V. & Lochstoer, Lars A. & Ramadorai, Tarun, 2013. "Limits to arbitrage and hedging: Evidence from commodity markets," Journal of Financial Economics, Elsevier, vol. 109(2), pages 441-465.

    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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