ASSET ALLOCATION FOR FUND OF FUNDS: AN INCENTIVE ANALYSIS

Asymmetric information leading to the moral hazard exists in the course of asset allocation for fund of funds. To reduce the conflict between the fund of funds manager and the venture capital fund manager and reduce the agency costs, we design an incentive mechanism to achieve those objectives. Through designing an optimal incentive contract, we find that the venture capital fund manager needs to invest personal capital and assume unlimited liability. We also design a reputation model and find that the fund of funds manager needs to take a mixed strategy to repeat the game with the venture capital fund manager.