Relative performance-based fund management leads to financial contagion and increased volatility.
Delegating portfolio managers' pay to their portfolio's performance compared to a benchmark affects financial markets. Investors may have lower expected gains, but markets become more informative and deeper. When managers focus on beating benchmarks, markets become more connected (financial contagion), prices become more volatile, and investors tend to favor local investments. However, when information is hard to come by, market depth and informativeness are reduced.