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The Journal of Alternative Investments

The Journal of Alternative Investments

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Article

Locking in the Profits or Putting It All on Black? An Empirical Investigation into the Risk-Taking Behavior of Hedge Fund Managers

Andrew D Clare and Nick Motson
The Journal of Alternative Investments Fall 2009, 12 (2) 7-25; DOI: https://doi.org/10.3905/JAI.2009.12.2.007
Andrew D Clare
is chair in asset management at The Centre for Asset Management Research at Cass Business School in London, U.K.
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  • For correspondence: a.clare@city.ac.uk
Nick Motson
is a FME/ESRC fellow at The Centre for Asset Management Research at Cass Business School in London, U.K.
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  • For correspondence: n.e.motson@city.ac.uk
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Abstract

The ideal fee structure aligns the incentives of the investor with those of the fund manager. Mutual funds typically only charge a management fee that is a proportion of the funds under management. Hedge funds, on the other hand, generally change an incentive fee that is a fraction of the fund’s return each year in excess of the high-water mark. The justification generally given for these incentive fees is that they provide the manager with the incentive to target absolute returns. As these incentive fees can be considered a call option on the performance of the fund, it is possible that the managers’ incentives might vary according to the delta of this option. A number of articles have examined the optimal investment strategies of money managers in the presence of incentive fees within theoretical frameworks with seemingly conflicting results. Using a large database of hedge fund returns, the authors examine the risk taking behavior of hedge fund managers in response to both their past returns relative to their high-water mark and their past returns relative to their peer group. An attempt is made to reconcile these results with the theoretical frameworks proposed.

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The Journal of Alternative Investments: 12 (2)
The Journal of Alternative Investments
Vol. 12, Issue 2
Fall 2009
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Locking in the Profits or Putting It All on Black? An Empirical Investigation into the Risk-Taking Behavior of Hedge Fund Managers
Andrew D Clare, Nick Motson
The Journal of Alternative Investments Sep 2009, 12 (2) 7-25; DOI: 10.3905/JAI.2009.12.2.007

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Locking in the Profits or Putting It All on Black? An Empirical Investigation into the Risk-Taking Behavior of Hedge Fund Managers
Andrew D Clare, Nick Motson
The Journal of Alternative Investments Sep 2009, 12 (2) 7-25; DOI: 10.3905/JAI.2009.12.2.007
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  • Article
    • Abstract
    • THEORETICAL MODELS OF BEHAVIOR IN THE PRESENCE OF INCENTIVE FEES
    • DATA
    • METHODOLOGY
    • RESULTS
    • CONTINGENCY TABLES
    • DISAGGREGATED ANALYSIS
    • VARYING THE ASSESSMENT PERIOD
    • FUND SIZE
    • FUND AGE
    • CONCLUSIONS
    • REFERENCES
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  • PDF (Subscribers Only)

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