Optimal fees in hedge funds with first-loss compensation

Marcos Escobar-Anel, Yevhen Havrylenko and Rudi Zagst
Authors registered in the RePEc Author Service: Marcos Escobar Anel ()

Papers from arXiv.org

Abstract: Hedge fund managers with the first-loss scheme charge a management fee, a performance fee and guarantee to cover a certain amount of investors' potential losses. We study how parties can choose a mutually preferred first-loss scheme in a hedge fund with the manager's first-loss deposit and investors' assets segregated. For that, we solve the manager's non-concave utility maximization problem, calculate Pareto optimal first-loss schemes and maximize a decision criterion on this set. The traditional 2% management and 20% performance fees are found to be not Pareto optimal, neither are common first-loss fee arrangements. The preferred first-loss coverage guarantee is increasing as the investor's risk-aversion or the interest rate increases. It decreases as the manager's risk-aversion or the market price of risk increases. The more risk averse the investor or the higher the interest rate, the larger is the preferred performance fee. The preferred fee schemes significantly decrease the fund's volatility.

Date: 2023-10
New Economics Papers: this item is included in nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published in Journal of Banking & Finance, Volume 118, 2020, 105884

Downloads: (external link)
http://arxiv.org/pdf/2310.19023 Latest version (application/pdf)

Related works:
Journal Article: Optimal fees in hedge funds with first-loss compensation (2020)
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:arx:papers:2310.19023

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().