Implicit incentives for fund managers with partial information

DOI10.1007/S10287-021-00404-WMaRDI QIDQ6166931zbMATH OpenOpenAlexFDO

Authors Flavio Angelini, Katia Colaneri, Stefano Herzel, Marco Nicolosi

Publication date 4 August 2023

Published in Computational Management Science (Search for Journal in Brave)

Copyright license Creative Commons Attribution 4.0 International

Full work available at URL https://arxiv.org/abs/2011.07871

zbMATH Keywords

learningoptimal controlportfolio management

Mathematics Subject Classification ID

Operations research and management science (90Bxx)

Abstract: We study the optimal asset allocation problem for a fund manager whose compensation depends on the performance of her portfolio with respect to a benchmark. The objective of the manager is to maximise the expected utility of her final wealth. The manager observes the prices but not the values of the market price of risk that drives the expected returns. The estimates of the market price of risk get more precise as more observations are available. We formulate the problem as an optimization under partial information. The particular structure of the incentives makes the objective function not concave. We solve the problem via the martingale method and, with a concavification procedure, we obtain the optimal wealth and the investment strategy. A numerical example shows the effect of learning on the optimal strategy.

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Cited in

(1)

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