Competition in the Outsourced Chief Investment Officer Market: A Game Theory Approach

Abstract

This study analyzes the competition in the outsourced chief investment officer (OCIO) market by utilizing a game-theory approach of multidimensional auctions, which is theoretically identical to the procurement auction system of OCIO selection. Depending on how the OCIO manages the fund, we analyze auctions using two distinct cases. In the first case, the OCIO operates a designated organization for each fund. This case leads to the conclusion that it is difficult for small funds to use OCIO services because of the high operational costs. In the second case, the OCIO manages multiple funds collectively, enabling even small funds to use OCIO services. Korea’s OCIO market currently operates according to the premise of the first case, meaning that small private funds are not likely to use the service even if a fund-type retirement pension is introduced. Thus, our conclusion implies that in the current OCIO structure, it is difficult for the Korean OCIO market to grow significantly. Policies and institutional supplementation are required.