Essays in delegated portfolio management

Abstract

This thesis consists of three chapters of independent but related work that investigate theoretically and empirically the organizational forms of delegated portfolio management. The first chapter proposes a theory of the organizational forms of investment vehicles based on adverse selection. Investors delegate the management of a pool of assets to an agent because of her superior but privately known ability. To tell managerial types apart, investors design compensation contracts that allow them to screen between managers of different abilities. We demonstrate that such a separation is possible in equilibrium when the proposed form of investment vehicle offers to investors debt and equity claims, such as a collateralized debt obligation. This organizational form will attract managers of high ability. Instead, lower ability managers will choose to manage structures that offer pure equity claims to investors, such as closed end funds, an organizational form arising only in a pooling equilibrium. The second chapter builds upon Chapter 1 and extends the theoretical framework to analyze the organizational determinants of equity structures such as open-end funds, closed-end funds and hedge funds. The analysis determines conditions for which each type of structure will arise in equilibrium. We show that managers will self select and choose a hedge fund structure when their investment skills exceed a minimum level. Managers below that threshold level will choose to manage either a closed-end or an open-end fund. The decision to open or close a fund does not only depend on managerial ability but also on the liquidity of the underlying assets. As such, it might well be the case that the decision to open a fund, given prior beliefs of low managerial ability,

(cont.) is reversed because of the high costs of liquidations when unexpectedly unwinding the positions. The third chapter is joint work with Ilan Guedj. We examine whether mutual fund families affect the performance of the funds they manage. From a sample of funds belonging only to large families we find that last year's best performing funds outperform last year's worst performing funds by 58 basis points. We also show that there exists persistence of performance of these funds inside their respective families. Supporting these findings, we also show that the better performing funds in a family have a higher probability of being allocated more managers, one of the main resources available. This is consistent with the view that fund families allocate resources in proportion to fund performance and not fund needs.