The implications of value-at-risk and short-selling restrictions for portfolio manager performance

After the recent financial crisis and the tightening of the regulation processes, portfolio managers regularly face strong restrictions, with complex implications for their performance. This paper provides a framework to analyze the performance of a portfolio manager under a value-at-risk (VaR) constraint, in a Markowitz setup. Using appropriate parameters, we calibrate the model for a manager with private information and compare the effect of VaR and short-selling (SS) constraints on the relationship between the expected portfolio return and the market return. We find that, in a more volatile market, the VaR restriction will have a greater effect on manager performance than the SS restriction. The VaR constraint also strongly affects a manager with high-quality information, while the SS restriction only moderately affects a manager with any level of information quality. Regarding their attitude toward risk, an overly aggressive manager will find their overall performance more affected by the VaR constraint.