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Optimal Decentralized Investment Management
Open accessAbstract
We study an institutional investment problem in which a centralized decision maker, the Chief Investment Officer (CIO), for example, employs multiple asset managers to implement investment strategies in separate asset classes. The CIO allocates capital to the managers who, in turn, allocate these funds to the assets in their asset class. This two‐step investment process causes several misalignments of objectives between the CIO and his managers and can lead to large utility costs for the CIO. We focus on (1) loss of diversification, (2) unobservable managerial appetite for risk, and (3) different investment horizons. We derive an optimal unconditional linear performance benchmark and show that this benchmark can be used to better align incentives within the firm. We find that the CIO's uncertainty about the managers' risk appetites increases both the costs of decentralized investment management and the value of an optimally designed benchmark.
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Citations
Cited by
A Demand System Approach to Asset Pricing
Koijen, R. S. J., & Yogo, M. (2019) · Journal of Political Economy · doi:10.1086/701683 · Cited by 688
Self-citationAsset Prices and Institutional Investors
Basak, S., & Pavlova, A. (2013) · American Economic Review · doi:10.1257/aer.103.5.1728 · Cited by 359
Blitz, D. C., & van Vliet, P. (2007) · The Journal of Portfolio Management · doi:10.3905/jpm.2007.698039 · Cited by 354
Metadata
- Authors
- Van BINSBERGEN, J. H., BRANDT, M. W., & KOIJEN, R. S. J.
- Venue
- The Journal of Finance
- Publisher
- Wiley
- Published
- 2008-07-19
- Volume
- 63
- Issue
- 4
- Pages
- 1849-1895
- ISSN
- 0022-1082 (ISSN-L)
- 1540-6261
- OpenAlex
- W2890027757
- Cited by
- 165
- References
- 0
- FWCI
- 9.11
- Type
- journal article
- Language
- en
- Open access
- green
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- Van BINSBERGEN, J. H., BRANDT, M. W., & KOIJEN, R. S. J. (2008). Optimal Decentralized Investment Management. The Journal of Finance. https://doi.org/10.1111/j.1540-6261.2008.01376.x
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