Decentralized Investment, Manager Structure and Firm Performance

In order to maximize portfolio return of a fund which is managed by multi-managers not belonging to a managerial hierarchy in a large investment institution, we introduce a decentralized investment method by which an optimal portfolio and optimal firm utility can be obtained. The analytical result shows that the firm performance with decentralized investment is different from that with centralized investment. Then we provide that some conditions can serve to improve the endogenous incentive conflict between the firm manager and asset managers, and to mitigate substantially the utility costs of decentralized investment management. Impractical results indicate the difference of efficient frontiers between the centralized investment and decentralized investment with same coefficient of relative risk aversion. We also discuss manager structure in a firm where the decision-making process is hierarchical.