Incentive Contracts and Hedge Fund Management
Posted: 28 Mar 2007
Abstract
We investigate incentive effects of a typical hedge-fund contract for a manager with power utility. With a one-year horizon, she displays risk-taking that varies dramatically with fund value. We extend the model to multiple yearly evaluation periods and find her risk-taking is rapidly moderated if the fund performs reasonably well. The most realistic approach to modeling fund closure uses an endogenous shutdown barrier where the manager optimally chooses to shut down. The manager increases risk-taking as fund value approaches that barrier, and this boundary behavior persists strongly with multiyear horizons.
Suggested Citation: Suggested Citation
Hodder, James Ernest and Jackwerth, Jens Carsten, Incentive Contracts and Hedge Fund Management. Journal of Financial and Quantitative Analysis, May 2006, Available at SSRN: https://ssrn.com/abstract=970439
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