We show that fund families allocate their fund managers to different market segments such that their skill is rewarded … she works. Even skilled managers can generate alpha only if the market segment is inefficient. Fund families take this … relation between skill and inefficiency into account and allocate their best managers to the least efficient market segment …

Incentive compensation induces correlation between the portfolio of managers and the cash flow of the firms they manage …. This correlation exposes managers to risk and hence gives them an incentive to hedge against the poor performance of their …