Incentives in Hedge Funds

Hitoshi Matsushima

No CARF-F-205, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: We investigate a game of delegated portfolio management such as hedge funds featuring risk-neutrality, hidden types, and hidden actions. We show that capital gain tax plays the decisive role in solving the incentive problem. We characterize the constrained optimal fee scheme and capital gain tax rate; the fee after taxation must be linear and affected by gains and losses in a low-powered and symmetric manner. We argue that high income tax incentivizes managers to select this scheme voluntarily. The equity stake suppresses the distortion caused by solvency.

Pages: 33 pages
Date: 2010-02
New Economics Papers: this item is included in nep-cta and nep-fmk
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Related works:
Working Paper: Incentives in Hedge Funds (2010)
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