Portfolio selection of a closed-end mutual fund (Q1935935)

The authors consider how the welfare of a fund manager is affected by regulations that prohibit her from investing in the fund on her own account. In a complete Itô-process setting, it turns out that this regulation has virtually no effect, if the manager is paid a weighted average of present and past fund values, computed by integrating the value of the fund against some deterministic, nondecreasing càdlàg process. Then, if there is either a terminal lump-sum payment or the investor's preferences over consumption stream are either lower semicontinuous or of expected utility type, the optimal performance is the same, with or without the regulation prohibiting the manager from investing in the fund she manages.