“Strategic Performance Allocation in Institutional Asset Management Firms: Behold the Power of Stars and Dominant Clients” by Zoran Ivkovich
Michigan State University
We identify strong and very robust evidence of strategic performance allocation in the institutional money management industry, directed toward strong recent performers, the money management firms’ high-value products. The extent of cross-subsidization varies with “demand”—the size of the portfolio held by the largest client invested in the product. We identify four channels through which strategic performance allocation likely operates, and show that its extent is related strongly to all three: availability of IPO opportunities, illiquidity of the products’ investment styles, cross-trading status of the firm, and custodian status of the firm. We also assess the magnitude of transfer away from the products that cross-subsidize this performance.