Panageas, Stavros and Westerfield, Mark M. (2009) High-water marks: high risk appetites? convex compensation, long horizons, and portfolio choice. The Journal of Finance, 64 (1). pp. 1-36. ISSN 0022-1082
We study the portfolio choice of hedge fund managers who are compensated by high-water mark contracts. We find that even risk-neutral managers do not place unbounded weights on risky assets, despite option-like contracts. Instead, they place a constant fraction of funds in a mean-variance efficient portfolio and the rest in the riskless asset, acting as would constant relative risk aversion (CRRA) investors. This result is a direct consequence of the in(de)finite horizon of the contract. We show that the risk-seeking incentives of option-like contracts rely on combining finite horizons and convex compensation schemes rather than on convexity alone.
|Additional Information:||© 2009 The American Finance Association|
|Library of Congress subject classification:||H Social Sciences > HG Finance|
|Sets:||Departments > Finance|
|Date Deposited:||26 Jun 2012 09:34|
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