Hedge and mutual funds’ fees and the separation of private investments

Paolo Guasoni () and Gu Wang ()

Finance and Stochastics, 2015, vol. 19, issue 3, 473-507

Abstract: A fund manager invests both the fund’s assets and own private wealth in separate but potentially correlated risky assets, aiming to maximize expected utility from private wealth in the long run. If relative risk aversion and investment opportunities are constant, we find that the fund’s portfolio depends only on the fund’s investment opportunities, and the private portfolio only on private opportunities. This conclusion is valid both for a hedge fund manager, who is paid performance fees with a high-water mark provision, and for a mutual fund manager, who is paid management fees proportional to the fund’s assets. The manager invests earned fees in the safe asset, allocating remaining private wealth in a constant-proportion portfolio, while the fund is managed as another constant-proportion portfolio. The optimal welfare is the maximum between the optimal welfares of each investment opportunity, with no diversification gain. In particular, the manager does not use private investments to hedge future income from fees. Copyright Springer-Verlag Berlin Heidelberg 2015

Keywords: Hedge funds; Portfolio choice; High-water marks; Performance fees; Management fees; 91G10; 91G80; G11; G12 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s00780-015-0266-y

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