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A Radical Proposal for the Operation of Multi-Manager Investment Funds Dan diBartolomeo First Draft: March 6, 1992 Revision: August 20, 1999 Abstract This paper proposes that large investment funds that currently employ multiple active managers convert to a system of centralized management. In such a scheme, current managers would take the role of advisers to a centrally operated fund. Although first proposed by Rosenberg (1977), funds of this kind have not been implemented. Recent analytical and technological advances have removed some of the impediments to such implementation. In addition, changes in financial market conditions have increased the attractiveness of such an arrangement. Many valuable comments from Jarrod Wilcox and Paul Bolster contributed greatly to this paper. The thanks of the author are extended in appreciation. Northfield Information Services 184 High Street Boston, MA 02110 617.451.2222 617.451.2122 fax A Radical Proposal for the Operation of Multi-Manager Investment Funds Introduction It is common practice for large investment funds to employ multiple active managers for each asset class in which they participate. This practice is most prevalent in equities, where it is typical for a large sponsor to have a dozen or more active managers, each selected on the presumption that each has some different perspective on equity portfolio strategy that will allow each manager to outperform a specified benchmark index. Since returns are additive linearly across the set of managers, the implication is that the overall fund will outperform the aggregate benchmark index. The set of managers selected is generally designed to diversify strategy and style, so that the overall fund is not dominated by any one approach and hence is protected from the risk that a predomina