Delegated Learning in Asset Management
AbstractWe develop a tractable framework of delegated asset management with flexible information acquisition in a multi-asset economy in which fund managers face moral hazard in portfolio allocation decisions. We explore the features of the optimal affine compensation contract for fund managers, in which benchmarking arises endogenously as part of their optimal compensation. In the equilibrium with delegated learning, asset prices reflect both the acquired private information of fund managers and their desire to hedge their exposure to the benchmark. We
show a potential gap between our model-implied measure and several widely-adopted empirical statistics intended to capture managerial ability. In a multi-period extension, we propose a new performance measure of fund manager skill.