OPTIMAL INVESTMENT IN HEDGE FUNDS UNDER LOSS AVERSION

Bin Zou ()
Additional contact information
Bin Zou: Department of Applied Mathematics, University of Washington, Lewis Hall 202, Box 353925, Seattle, Washington 98195-3925, USA

International Journal of Theoretical and Applied Finance (IJTAF), 2017, vol. 20, issue 03, 1-32

Abstract: We study optimal investment problems in hedge funds for a loss averse manager under the framework of cumulative prospect theory. We obtain explicit solutions for a general utility function satisfying the Inada conditions and a piece-wise exponential utility function. Through a sensitivity analysis, we find that the manager reduces the risk of the hedge fund when her/his loss aversion, risk aversion, ownership in the fund, or management fee ratio increases. However, the increase of incentive fee ratio drives the manager to seek more risk in order to achieve higher prospect utility.

Keywords: Cumulative prospect theory; exponential utility; optimal investment; power utility; risk management; sensitivity analysis (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219024917500145
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:20:y:2017:i:03:n:s0219024917500145

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219024917500145

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().