TY  - JOUR
AU  - Binsbergen,Jules H. van
AU  - Brandt,Michael W.
AU  - Koijen,Ralph S.J.
TI  - Optimal Decentralized Investment Management
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12144
PY  - 2006
Y2  - April 2006
UR  - http://www.nber.org/papers/w12144
L1  - http://www.nber.org/papers/w12144.pdf
N1  - Author contact info:
Jules H. van Binsbergen
Kellogg Graduate School of Management
Northwestern University
2001 Sheridan Road
Evanston, IL 60201
Tel: 847/491-3562
Fax: 847/491-5719
E-Mail: j-vanbinsbergen@kellogg.northwestern.edu

Michael W. Brandt
Fuqua School of Business
Duke University
One Towerview Drive
Durham, NC  27708
Tel: 919/660-1948
Fax: 919/660-8038
E-Mail: mbrandt@duke.edu

Ralph Koijen
University of Chicago
Booth School of Business
5807 South Woodlawn Avenue
Chicago, IL 60637
Tel: 773/834-4199
E-Mail: ralph.koijen@chicagobooth.edu
AB  - We study a decentralized investment problem in which a CIO employs multiple asset managers to implement and execute investment strategies in separate asset classes. The CIO allocates capital to the managers who, in turn, allocate these funds to the assets in their asset class. This two-step investment process causes several misalignments of objectives between the CIO and his managers
and can lead to large utility costs on the part of the CIO. We focus on i) loss of diversification ii) different appetites for risk, iii) different investment horizons, and iv) the presence of liabilities. We derive an optimal unconditional linear performance benchmark and show that this benchmark can be used to better align incentives within the firm. The optimal benchmark substantially mitigates the utility costs of decentralized investment management. These costs can be further reduced when the CIO can screen asset managers on the basis of their risk appetites. Each manager%u2019s optimal level of risk aversion depends on the asset class he manages and can differ substantially from the CIO%u2019s level of risk aversion.
ER  -