Performance fees and hedge fund return dynamics

Serge Darolles and Christian Gouriéroux

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Abstract: A characteristic of hedge funds is not only an active portfolio management, but also the allocation of portfolio performance between different accounts, which are the accounts for the external investors and an account for the management firm, respectively. Despite lack of transparency in hedge fund market, the strategy of performance allocation is publicly available. This paper shows that, for the High-Water Mark Scheme, these complex performance allocation strategies might explain empirical facts observed in hedge fund returns, such as return persistence, skewed return distribution, bias ratio, or implied increasing risk appetite.

Keywords: Hedge funds; Performance fees; Manager incentive; Risk appetite; High water mark (search for similar items in EconPapers)
Date: 2015-03
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Published in International Journal of Approximate Reasoning, 2015, 65, ⟨10.1016/j.ijar.2015.03.006⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01632880

DOI: 10.1016/j.ijar.2015.03.006

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