Guillaume PlantinGuillaume Plantin
Bio sketch:
Guillaume Plantin is a Senior Research Chair at the Toulouse School of Economics. Prior to joining Toulouse, Plantin was an assistant professor of finance at London Business School and at the Tepper School of Business, Carnegie Mellon University. He also served as a financial regulator at the French Insurance Supervisory Authority. His research interests include risk management for financial institutions, financial innovation, and the determinants of liquidity and financial stability. He is the co-author with Jean-Charles Rochet of “When Insurers Go Bust, an Economic Analysis of the Prudential Regulation of Insurance Companies” (Princeton University Press). He has published articles in the Review of Economic Studies, the Journal of Finance, the Journal of Accounting Research, and the Journal of Risk and Insurance. Plantin holds a PhD in economics from the University of Toulouse.
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Abstract:
This paper develops a model of active portfolio management in which fund managers may secretly gamble in order to manipulate their reputation and attract more funds. We show that such trading strategies may expose investors to severe losses and are more likely to occur when fund managers are impatient; their trading skills are scalable and generate higher profit per unit of risk. We study investment management contracts that deter this behavior. If investors are short-lived, then the manager must leave rents to investors in order to credibly commit not to gamble. If investors are long-lived, contracts that increase but defer expected bonuses after an outstanding performance implement the first-best. Our model can explain a number of observed differences in performance between mutual and hedge funds. In particular, it explains why persistence in net risk-adjusted returns can be higher for hedge funds, and offers a rationale for the prevalence of high-water mark contracts.
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