Efficiently Inefficient Markets for Assets and Asset Management
We consider a model where investors can invest directly or search for an asset manager, information about assets is costly, and managers charge an endogenous fee. The efficiency of asset prices is linked to the efficiency of the asset management market: if investors can find managers more easily, more money is allocated to active management, fees are lower, and asset prices are more efficient. Informed managers outperform after fees, uninformed managers underperform after fees, and the net performance of the average manager depends on the number of "noise allocators." Finally, we show why large investors should be active and discuss broader implications and welfare considerations.
We are grateful for helpful comments from Jules van Binsbergen, Ronen Israel, Stephen Mellas, Jim Riccobono, Andrei Shleifer, and Morten Sorensen, as well as from seminar participants at Harvard University, New York University, UC Berkeley-Haas, CEMFI, IESE, Toulouse School of Economics, MIT Sloan, Copenhagen Business School, and the conferences at Queen Mary University of London, the Cowles Foundation at Yale University, the European Financial Management Association Conference, the 7th Erasmus Liquidity Conference, the IF2015 Annual Conference in International Finance, the FRIC'15 Conference, and the Karl Borch Lecture. Pedersen gratefully acknowledges support from the European Research Council (ERC grant no. 312417) and the FRIC Center for Financial Frictions (grant no. DNRF102) The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Lasse H. Pedersen
Lasse Heje Pedersen is a professor at Copenhagen Business School and NYU Stern School of Business, a research affiliate at CEPR, and a principal at AQR Capital Management. His full curriculum vitae is available on his website: www.lhpedersen.com
NICOLAE GÂRLEANU & LASSE HEJE PEDERSEN, 2018. "Efficiently Inefficient Markets for Assets and Asset Management," The Journal of Finance, vol 73(4), pages 1663-1712.