An Option-Pricing Framework for the Valuation of Fund Management Compensation

Axel Buchner, Abdulkadir Mohamed and Niklas Wagner

A chapter in Derivative Securities Pricing and Modelling, 2012, pp 331-350 from Emerald Group Publishing Limited

Abstract: Compensation of funds managers increasingly involves elements of profit sharing that entitle managers to option-like payoffs. An important example is the compensation of private equity fund managers. Compensation of private equity fund managers typically consists of a fixed management fee and a performance-related carried interest. The fixed management fee resembles common compensation terms of mutual funds and hedge funds, while the performance-related carried interest is uncommon among most mutual funds. Moreover, the performance-related carried interest typically differs from variable hedge fund fees. In this chapter, we derive the value of the variable components of private equity fund managers’ compensation based on a risk-neutral option-pricing approach.

Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:eme:csefzz:s1569-3759(2012)0000094016

DOI: 10.1108/S1569-3759(2012)0000094016

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