Incentive Contracts and Hedge Fund Management: a Numerical Evaluation Procedure
42 Pages Posted: 15 Mar 2007
Date Written: September 15, 2003
Abstract
The behavior of a hedge-fund manager naturally depends on her compensation scheme, her preferences, and constraints on her risk-taking. We propose a numerical method which can be used to analyze the impact of these influences. The model leads to several interesting and novel results concerning her risk-taking and other managerial decisions. We are able to relate our results to partial results in the literature and show how they fit in a more general context. We also allow the manager to voluntarily shut down the fund as well as enhancing the fund's Sharpe Ratio through additional effort. Both these extensions generate additional insights. Throughout the paper, we find that even slight changes in the compensation structure or the extent of managerial discretion can lead to drastic changes in her risk-taking.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Michael J. Brennan and Feifei Li
-
Equilibrium Prices in the Presence of Delegated Portfolio Management
By Domenico Cuoco and Ron Kaniel
-
Portfolio Performance and Agency
By Philip H. Dybvig, Heber Farnsworth, ...
-
Portfolio Performance and Agency
By Philip H. Dybvig, Heber Farnsworth, ...
-
Portfolio Performance and Agency
By Heber Farnsworth, Philip H. Dybvig, ...
-
Portfolio Performance and Agency
By Philip H. Dybvig, Heber Farnsworth, ...
-
Equilibrium Prices in the Presence of Delegated Portfolio Management
By Domenico Cuoco and Ron Kaniel
-
Offsetting the Incentives: Risk Shifting and Benefits of Benchmarking in Money Management
By Suleyman Basak, Anna Pavlova, ...
-
Offsetting the Incentives: Risk Shifting and Benefits of Benchmarking in Money Management
By Suleyman Basak, Anna Pavlova, ...