Optimal Fund Menus

Host

Department of Applied Mathematics

Speaker

Jaksa Cvitanic
Division of The Humanities and Social Sciences, California Institute of Technology
https://jaksacvitanic.com/

Description

We study the optimal design of a menu of funds by a manager who is required to use linear pricing and does not observe the beliefs of investors regarding one of the risky assets. The optimal menu involves bundling of assets and can be explicitly constructed from the solution to a calculus of variations problem that optimizes over the indirect utility that each type of investor receives. We provide a complete characterization of the optimal menu and show that the need to maintain incentive compatibility leads the manager to offer funds that are inefficiently tilted towards the asset that is not subject to the information friction. Joint with Julien Hugonnier.