The impact of benchmarking and portfolio constraints on a fund manager´s market timing ability

Juan Pedro Gomez ()
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Juan Pedro Gomez: Instituto de Empresa

Working Papers Economia from Instituto de Empresa, Area of Economic Environment

Abstract: We study the effects that relative (to a benchmark) performance evaluation has on the provision of incentives for the search of private information when managers are exogenously constrained in their ability to sell short and purchase on margin. With these portfolio constraints we show that benchmarking the manager´s incentive fee affect her timing ability and hence there exist an optimal benchmark, even without moral hazard between the investor and manager. In the presence of moral hazard, numerical results show that the optimal incentive fee is higher than the Pareto-efficient fee and the optimal benchmark is risky but less so than the no moral hazard benchmark.

Keywords: Benchmarking; Incentive fee; Market timing; Portfolio constraints (search for similar items in EconPapers)
Pages: 32 pages
Date: 2007-03
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Persistent link: https://EconPapers.repec.org/RePEc:emp:wpaper:wp07-02

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