Fund Manager Allocation

We study whether fund families efficiently allocate their fund managers to differentmarket segments. Whether a fund manager can generate alpha simultaneouslydepends on her skills, and on the efficiency of the market segment in which she isemployed. We show that in the more efficient investment grade bond fund marketsegment, fund managers cannot translate higher skill into higher fund alpha. Incontrast, skilled managers can generate higher alpha in the less efficient high yieldbond market segment. Fund families take this relation between skill andinefficiency into account and allocate their smartest managers to the least efficientmarket segment.