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A Unified Theory of Delegated Capital Management

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Listed:
  • Jonathan B. Berk
  • Peter M. DeMarzo

Abstract

We develop a unified theory of delegated capital management by extending the paradigm of Berk and Green (2004) from mutual funds to alternative assets. With competitive markets and rational investors, we derive the optimal contract and account for observed regularities --- performance fees, persistent alpha, and limits on capital. The key distinction between mutual funds and alternatives is the liquidity of the underlying assets. When assets are illiquid, it is optimal to acquire information about the manager's skill. A positive alpha is therefore necessary to compensate informed investors and a performance based contract is required to induce these investors to allocate their capital optimally. At the same time, a free-rider problem emerges that requires capital constraints on uninformed investors. Thus, liquidity of the underlying assets explains the contrasting contract structures across sectors.

Suggested Citation

  • Jonathan B. Berk & Peter M. DeMarzo, 2026. "A Unified Theory of Delegated Capital Management," NBER Working Papers 34628, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:34628
    Note: AP CF
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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G2 - Financial Economics - - Financial Institutions and Services
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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