{
  "title": "Delegated Portfolio Management, Benchmarking, and the Effects on Financial Markets",
  "publication": "IMF Working Papers, September 8, 2015",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/delegated-portfolio-management-benchmarking-and-the-effects-on-financial-markets-43262",
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  "summary": "We analyze the implications of linking the compensation of fund managers to the return of their portfolio relative to that of a benchmark—a common solution to the agency problem in delegated portfolio management.",
  "sections": [
    {
      "heading": "Summary of scope and approach",
      "content": "- Analyzes implications of linking fund managers' compensation to the return of their portfolio relative to a benchmark (relative-performance-based objectives).\n- Investigates effects in single- and multiple-asset/market frameworks.\n- Considers cases with costly information acquisition and the resulting equilibrium effects."
    },
    {
      "heading": "Key findings",
      "content": "- Relative-performance-based objectives reduce investors' expected utility.\n- Markets are typically more informative and deeper when managers are benchmarked.\n- In a multiple asset/market framework:\n  - Relative performance concerns lead to an increase in the correlation between markets (financial contagion).\n  - Benchmark inclusion increases price volatility.\n  - Home bias emerges as a rational outcome.\n- When information is costly:\n  - Information acquisition is hindered.\n  - This attenuation reduces the effects on market informativeness and depth."
    },
    {
      "heading": "Policy-relevant implications and conceptual takeaways",
      "content": "- Benchmarking of fund managers can improve market informativeness and depth but at the cost of investors' expected utility.\n- Benchmark-linked compensation creates incentives that can raise systemic linkages across markets (higher cross-market correlation), elevating potential for financial contagion.\n- Inclusion in benchmarks can amplify price volatility, suggesting trade-offs between transparency/information aggregation and market stability.\n- Costly information environments weaken the beneficial market effects of benchmarking by discouraging information acquisition.\n- Home bias can be rationalized within models where relative performance matters, implying that policies aiming to reduce home bias should consider incentive structures of delegated managers.\n\n---\n\n Content in this bundle\n\n- wp15198 - References\n  - wp15198 - References (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp15198 - References (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/delegated-portfolio-management-benchmarking-and-the-effects-on-financial-markets-43262"
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    "Authors: Deniz O Igan, Marcelo Pinheiro",
    "Published: September 8, 2015",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781513586878.001",
    "Analyzes implications of linking fund managers' compensation to the return of their portfolio relative to a benchmark (relative-performance-based objectives).",
    "Investigates effects in single- and multiple-asset/market frameworks.",
    "Considers cases with costly information acquisition and the resulting equilibrium effects.",
    "Relative-performance-based objectives reduce investors' expected utility.",
    "Markets are typically more informative and deeper when managers are benchmarked.",
    "In a multiple asset/market framework:",
    "When information is costly:",
    "Benchmarking of fund managers can improve market informativeness and depth but at the cost of investors' expected utility.",
    "Benchmark-linked compensation creates incentives that can raise systemic linkages across markets (higher cross-market correlation), elevating potential for financial contagion.",
    "Inclusion in benchmarks can amplify price volatility, suggesting trade-offs between transparency/information aggregation and market stability.",
    "Costly information environments weaken the beneficial market effects of benchmarking by discouraging information acquisition.",
    "Home bias can be rationalized within models where relative performance matters, implying that policies aiming to reduce home bias should consider incentive structures of delegated managers.",
    "**_wp15198 - References**"
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