The high-water mark provision in hedge fund managers' compensation raises concerns of investors, because they are worried about that fund managers would take unnecessarily high risk in the fund investment. In this paper, we theoretically analyze the optimal strategies for hedge fund managers who choose to maximize the expected power utility from fees in both discrete-time and continuous- time models. The results show that when approaching the fee payment date, hedge fund managers would take as much risk as they are allowed to in the fund investment. However, if hedge fund managers are given more time, they tend to be more conservative. In the continuous-time model, the optimal allocation of the fund in the risky asset depends on market conditions, which are measured by the state price density.

Creator

• Gong, Yuhui

Colaboradores

• Wang, Gu

Degree

• MS

Unit

• Mathematical Sciences

Publisher

• Worcester Polytechnic Institute

Language

• English

Identifier

• etd-042717-162755

Palavra-chave

• Moral Hazard
• High-water Mark
• Hedge Fund

Advisor

• Wang, Gu

Defense date

• 2017-04-27

Year

• 2017

Date created

• 2017-04-27

Resource type

• Report

Rights statement

• In Copyright