Hedge fund seeding via fees-for-seed swaps under idiosyncratic risk

Christian-Oliver Ewald and Hai Zhang

Journal of Economic Dynamics and Control, 2016, vol. 71, issue C, 45-59

Abstract: We develop a dynamic valuation model of the hedge fund seeding business by solving the consumption and portfolio-choice problem for a risk-averse manager who launches a hedge fund through a seeding vehicle. This vehicle, i.e. fees-for-seed swap, specifies that a strategic partner (seeder) provides a critical amount of capital in exchange for participation in the funds revenue. Our results indicate that the new swap not only solves the serious problem of widespread financing constraints for new and early-stage funds (ESFs) managers, but can be highly beneficial to both the manager and the seeder if structured properly.

Keywords: Hedge funds; Investment; Real options (search for similar items in EconPapers)
JEL-codes: G11 G12 G23 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:71:y:2016:i:c:p:45-59

DOI: 10.1016/j.jedc.2016.07.007

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