Asset Management as Creator of Market Inefficiency

Abstract In this paper, we describe how agency frictions in asset management can generate prime violations of the Efficient Markets Hypothesis, such as momentum, value and an inverted risk-return relationship. Momentum our theory is associated with procyclical fund flows price over-reaction, more pronounced for overvalued assets. The investors who momentum are losing from it those requiring their managers to keep portfolios close benchmark indices. Our suggests a rethinking contracts. Contracts should employ measures long-run risk return, indices that emphasize fundamentals. There also be greater transparency on managers’ choice strategies.