Hedge fund managers receive a large fraction of their funds' profits, paid when funds exceed their high-water marks. We study the incentives of such performance fees. A manager with long-horizon, constant investment opportunities and relative risk aversion, chooses a constant Merton portfolio. However, the effective risk aversion shrinks toward one in proportion to performance fees. Risk shifting implications are ambiguous and depend on the manager's own risk aversion. Managers with equal investment opportunities but different performance fees and risk aversions may coexist in a competitive equilibrium. The resulting leverage increases with performance fees-a prediction that we confirm empirically.
Guasoni P, Obloj J (2016). THE INCENTIVES OF HEDGE FUND FEES AND HIGH-WATER MARKS. MATHEMATICAL FINANCE, 26(2), 269-295 [10.1111/mafi.12057].
THE INCENTIVES OF HEDGE FUND FEES AND HIGH-WATER MARKS
Guasoni P
Co-primo
;
2016
Abstract
Hedge fund managers receive a large fraction of their funds' profits, paid when funds exceed their high-water marks. We study the incentives of such performance fees. A manager with long-horizon, constant investment opportunities and relative risk aversion, chooses a constant Merton portfolio. However, the effective risk aversion shrinks toward one in proportion to performance fees. Risk shifting implications are ambiguous and depend on the manager's own risk aversion. Managers with equal investment opportunities but different performance fees and risk aversions may coexist in a competitive equilibrium. The resulting leverage increases with performance fees-a prediction that we confirm empirically.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
