Jackwerth, Jens Carsten and Hodder, James E. (2006): Incentive Contracts and Hedge Fund Management. Published in: Journal of Financial and Quantitative Analysis , Vol. 42, No. 4 (2007): pp. 811-826.
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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.
|Item Type:||MPRA Paper|
|Original Title:||Incentive Contracts and Hedge Fund Management|
|English Title:||Incentive Contracts and Hedge Fund Management|
|Keywords:||Hedge Fund; Management; Incentive|
|Subjects:||G - Financial Economics > G2 - Financial Institutions and Services > G23 - Non-bank Financial Institutions ; Financial Instruments ; Institutional Investors
G - Financial Economics > G0 - General > G00 - General
|Depositing User:||Jens Jackwerth|
|Date Deposited:||19. Nov 2008 06:44|
|Last Modified:||21. Feb 2013 03:31|
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