Identifier

etd-042717-162755

Abstract

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.

Publisher

Worcester Polytechnic Institute

Degree Name

MS

Department

Mathematical Sciences

Project Type

Thesis

Date Accepted

2017-04-27

Accessibility

Unrestricted

Subjects

Hedge Fund, High-water Mark, Moral Hazard

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