In my first essay, I demonstrate how the Cremers and Petajisto (2009) Active Share measure can be re-parameterized into the standard portfolio parameters we typically see in other portfolio management studies, namely betas and standard deviations. This demonstrates that Active Share is not very different than the measures we traditionally use to study portfolio management. One of the parameters that results from the re-parameterization is a measure of the risk of the manager's active bets, the volatility of the implied hedge position relative to the benchmark. This parameter is equally as strong as Active Share in predicting excess performance and helps give a better economic understanding of why Active Share exhibits predictive power. Active Share and this implied hedge measure are like a confidence and information problem. In my second essay, I use the idea of benchmark relative investment optimization as outlined in Roll (1992). These portfolios are sub-optimal but they can be better than the alternative, i.e., better than the portfolios that the principals could build themselves. I outline the conditions under which delegated managers increase the principal's utility. Additionally, if implemented properly, tracking error constraints, Jorion (2003) and beta constraints, Roll (1992), can force the delegated manager to buy a more efficient portfolio than the benchmark. Thus, even though relative utility maximization is sub-optimal, if the delegated manager is more skillful than the principal in portfolio construction, delegated portfolio management is still likely preferred to naively holding the benchmark.

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. In the presence of such relativeperformance- based objectives, investors have reduced expected utility but markets are typically more informative and deeper. Furthermore, in a multiple asset/market framework we show that (i) relative performance concerns lead to an increase in the correlation between markets (financial contagion); (ii) benchmark inclusion increases price volatility; (iii) home bias emerges as a rational outcome. When information is costly, information acquisition is hindered and this attenuates the effects on informativeness and depth of the market.

Thèse. HEC. 2017

This dissertation is a compilation of three papers that investigate the role of optimal contracting in a delegated portfolio management setting. While the study of optimal contracts in classical principal-agent setup has been extensively studied, relatively few have been studied in the context of delegated portfolio management in finance. And even delegated portfolio management papers in finance, there are still several open questions and unresolved issues that are beyond the scope of a standard principal-agent problem. In Chapter 1, I study a continuous-time principal-agent problem with drift and stochastic volatility control. While the problem with drift-only control by an agent has been extensively studied recently, very few existing papers allow an agent to endogenously influence volatility. Endogenous volatility control is particularly important in delegated portfolio management settings as volatility is one of the defining aspects of modern financial portfolio management. In Chapter 2, I study a model that encompasses dynamic agency, delegated portfolio management and asset pricing. Traditionally, the fields of ``asset pricing'' and ``corporate finance'' are studied independently of each other. However, as the modern portfolio management industry blooms in size and influence, the role of the portfolio manager and the contracts that are extended to them arguably has a role in the securities that they invest in, and hence in equilibrium, the asset pricing implications of the market overall. This paper is an attempt to bridge ``asset pricing'' and ``corporate finance'' (specifically interpreted to mean delegated portfolio management contracting) into one. In Chapter 3, I study whether a principal investor is better off delegating most of his money to a single portfolio manager (centralized delegation), as opposed to multiple portfolio managers (decentralized delegation), especially when there is the possible presence of moral hazard. With the size of the hedge fund industry and growing empirical support that moral hazard is a growing risk among hedge fund managers, it becomes imperative to understand when an investor decides to delegate his money, should it be delegated in a more centralized or decentralized fashion.