We study the optimal design of a menu of funds by a manager who is required
to use linear pricing and does not observe the preferences of investors regarding
one of the risky assets. The optimal menu involves bundling of assets and is
explicitly constructed from the solution to a calculus of variations problem that
optimizes over the indirect utilities that each type of investor receives. We show that the need to
maintain incentive compatibility leads the manager to behave as a closet indexer
by offering funds that are inefficiently tilted towards the asset not subject
to the information friction.