Abstract

In the managed fund industry, compensation is linked to relative performance. As a consequence, behavior takes the form of a tournament. We analyze a contest between two risk averse fund managers who allocate funds between a risk-free bond and a risky stock. The manager with the higher return wins the contest and his compensation is proportional to the difference of returns between the funds. We analyze the Nash equilibria of the game. We show that there exists an equilibrium in pure strategies in which managers coordinate in using opposite extreme investment strategies. We then derive a symmetric full-support mixed strategy equilibrium. We then investigate the impact of the competitiveness of the benchmark on investment strategies.