Multi-market Delegated Asset Management

This paper studies optimal contracting in delegated asset management when a fund manager can exert unobservable e¤ort and take unobservable investment positions in multiple markets. A key insight is that while giving the manager exibility to invest in multiple markets increases investment e ¢ ciency, it weakens the link between fund performance and the managers e¤ort in his designated market, thus increasing agency cost. Building on this tradeo¤, our model explains the existence of funds with narrow invest-ment mandates, together with a set of testable implications for a varying degree of investment exibility across funds. These results shed light on capital immobility in \u85nancial markets, market segmentation, and architect of nancial institutions