Pricing of Money Management Firms: A Bleak Future or an Example of Limits of Arbitrage?
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Date: 09-13-2004
Start Time:
6:00pm
End Time: 7:30pm
Speaker: Gur Huberman, Columbia University
Location: 412 Shapiro CEPSR, Davis Auditorium
ABSTRACT
Although established money managers operate in an
environment which seems competitive, they also seem to be very profitable. The
present value of the expected future profits from managing a collection of funds
is equal to the value of the assets under management times the profit margin,
assuming that the managed funds will remain in business forever, zero asset flow
into and out of the funds, zero excess returns net of trading costs, fixed
management fee proportional to the assets under management and a fixed profit
margin for the management company. A profit margin of 30% seems empirically
reasonable, but money management companies seem to trade at 2-4% of assets under
management. Attempts to reconcile the two figures are not compelling which is
disturbing considering the centrality of the present value formula to finance
and economics.
BIO
Gur Huberman is on the faculty of Columbia Business School where he teaches courses on behavioral finance. Having received his PhD in operations research from Yale, he has taught at the University of Chicago and Tel Aviv University.