DF Lunch Seminar - Simon Gervais, Duke University

Abstract: We develop a rational expectations equilibrium model of active money management in which fund managers’ trades affect firms’ real investment through financial market prices. Three results emerge. First, as more investors delegate capital, fund portfolios converge to the market portfolio, reducing measured outperformance. Second, while gross alpha is positive, net alpha can be negative in equilibrium, especially when hedging motives are strong or productivity is difficult to learn. Third, negative net alpha does not imply that delegation is socially undesirable: by improving capital allocation, active money management can still raise aggregate welfare. The seminar will be held in person. Light lunch will be provided for registered participants only.