Labor Market Competition among Money Managers and Investment Correlation

In an economy in which asset management firms compete both for money to manage and for managers to manage it, I show that a manager's compensation scheme is endogenously benchmarked against the market return when the expected market return is high whereas it is benchmarked against the performance of other active managers when the expected market return is low. Managers concerned about labor market outcomes adjust their investment strategies accordingly: when they expect high returns, managers correlate their investments with one another so as to accelerate the revelation of their abilities. By contrast, when anticipating low returns managers differentiate their investments so as to increase the relative returns that they can generate compared to their peers