Path-Dependent Alpha: Optimal Contracts, Career Dynamics, and the Cross-Section of Fund Performance

Résumé

We develop a general equilibrium model of active asset management in which optimal contracts generate endogenous alpha heterogeneity through path-dependent career dy- namics. Effort, pay, and AUM are functions of one state variable, the manager’s contin- uation value, which evolves with performance. Even with ex ante identical managers, the cross-section of alpha is heterogeneous: history, not type, determines performance. Effort costs scale sublinearly with AUM, producing a hump-shaped effort function and endogenous diseconomies of scale. Structural estimation on hedge fund data matches median tenure, the negative-alpha share, and extreme AUM concentration. Convex capital flows and path dependence generate a superstar effect without heterogeneity in ability.

Biographie

Serge Darolles is Professor of Finance at Université Paris-Dauphine (PSL), where he has taught financial econometrics and empirical finance since 2012. He holds a PhD in Applied Mathematics from the University of Toulouse and a postgraduate degree from ENSAE Paris. Before academia, he spent over a decade at Lyxor Asset Management (2000–2012) building quantitative models for investment strategies. His research centers on financial econometrics, hedge funds, liquidity, and asset management, with numerous journal articles and several co-authored books in quantitative finance.