Cross-Subsidization in Institutional Asset Management Firms

We identify strong and robust evidence of strategic performance allocation in the institutional money management industry, directed toward strong recent performers. The extent of strategic performance allocation varies with the product's client power. Strategic performance allocation is particularly pronounced for young products. Studying variation in opportunities for strategic performance allocation (illiquidity of the products' investment styles and cross-trading status of the firm) enables us to show that (at least part of) strategic performance allocation rests upon cross-subsidization. We also quantify, and assess the implications of, strategic performance allocation away from the products that likely cross-subsidize this performance