Hedge fund fee structure and risk exposure

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dc.coverageDOI: 10.1016/j.econmod.2024.106646
dc.creatorBraun, Matias
dc.creatorRiutort, Julio
dc.creatorRoche, Hervé
dc.date2024
dc.date.accessioned05-01-2026 18:05
dc.date.available05-01-2026 18:05
dc.description<p>We provide a closed-form solution for the optimal investment strategy of a hedge fund manager compensated by a management fee and a high-water mark (HWM) contract. The fraction of the assets under management (AUM) allocated to equity is an increasing and convex function of distance to the HWM, with the size of the incentive fee rate enhancing the convexity effect. Importantly, the management fee induces more risk-taking behavior because it provides insurance to the fund manager. Beating the HWM by small amounts is optimal because it mitigates the ratchet feature of the HWM and smooths revenue. The decomposition of revenues between the two fee types is also examined. An extension introduces fund termination triggered by a large AUM drawdown. Risk exposure is either a decreasing or a hump-shaped function of the distance to the HWM.</p>eng
dc.identifierhttps://investigadores.uandes.cl/en/publications/96fa1b6e-a999-4e8d-b9ed-a37f09d003dc
dc.languageeng
dc.rightsinfo:eu-repo/semantics/restrictedAccess
dc.sourcevol.132 (2024)
dc.subjectHedge funds
dc.subjectHigh-water mark
dc.subjectIncentive fees
dc.subjectManagement fees
dc.subjectOptimum portfolio rules
dc.subjectRatchet effect
dc.titleHedge fund fee structure and risk exposureeng
dc.typeArticleeng
dc.typeArtículospa
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