Strategic Asset Allocation under Peer Group Benchmarks

Herve Roche and Nicolas Sahuguet

No 17042, CEPR Discussion Papers from Centre for Economic Policy Research

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.

Keywords: Strategic portfolio allocation; Incentive fees; Managed fund industry; Tournaments; Peer-comparison benchmarks (search for similar items in EconPapers)
JEL-codes: C61 C73 D81 G11 G20 (search for similar items in EconPapers)
Date: 2022-02
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