Competition in Fund Management and Forward Relative Performance Criteria

TL;DR

This paper develops forward relative performance criteria for fund managers in Ito-diffusion markets, analyzing competitive and passive strategies under relaxed assumptions, and extends results to correlated endowment scenarios.

Contribution

It introduces forward performance criteria in competitive fund management, relaxing traditional assumptions and solving CRRA cases in both complete and incomplete markets.

Findings

Derived forward equations for riskless criteria

Solved CRRA cases in competitive settings

Extended forward performance to correlated endowments

Abstract

In an Ito-diffusion market, two fund managers trade under relative performance concerns. For both the asset specialization and diversification settings, we analyze the passive and competitive cases. We measure the performance of the managers' strategies via forward relative performance criteria, leading to the respective notions of forward best-response criterion and forward Nash equilibrium. The motivation to develop such criteria comes from the need to relax various crucial, but quite stringent, existing assumptions -- such as, the a priori choices of both the market model and the investment horizon, the commonality of the latter for both managers as well as the full a priori knowledge of the competitor's policies for the best-response case. We focus on locally riskless criteria and deduce the random forward equations. We solve the CRRA cases, thus also extending the related results in the classical setting. An important by-product of the work herein is the development of forward performance criteria for investment problems in Ito-diffusion markets under the presence of correlated random endowment process for both the perfectly and the incomplete market cases.