DP13127 Optimal fund menus

Author(s): Jaksa Cvitanic, Julien Hugonnier
Publication Date: August 2018
Date Revised: October 2018
Keyword(s): asset bundling, linear pricing, Mutual fund menus, screening
JEL(s): C62, C71, D42, D82, G11
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13127

We study the optimal design of a menu of funds by a manager who is required to use linear pricing and does not observe the beliefs of investors regarding one of the risky assets. The optimal menu involves bundling of assets and can be explicitly constructed from the solution to a calculus of variations problem that optimizes over the indirect utility that each type of investor receives. We provide a complete characterization of the optimal menu and show that the need to maintain incentive compatibility leads the manager to offer funds that are inefficiently tilted towards the asset that is not subject to the information friction.