Panageas, Stavros and Westerfield, Mark M. (2009) High-water marks: high risk appetites? convex compensation, long horizons, and portfolio choice. Journal of Finance, 64 (1). pp. 1-36. ISSN 0022-1082
Full text not available from this repository.Abstract
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.
| Item Type: | Article |
|---|---|
| Official URL: | http://www.afajof.org/journal/browse.asp |
| Additional Information: | © 2009 The American Finance Association |
| Divisions: | Finance |
| Subjects: | H Social Sciences > HG Finance |
| Date Deposited: | 26 Jun 2012 09:34 |
| Last Modified: | 12 Nov 2024 06:18 |
| URI: | http://eprints.lse.ac.uk/id/eprint/44490 |
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