Incentive Contracts and Hedge Fund Management

Jens Carsten Jackwerth and James E. Hodder

MPRA Paper from University Library of Munich, Germany

Abstract: We investigate incentive effects of a typical hedge-fund contract for a manager with power utility. With a one-year horizon, she displays risk-taking that varies dramatically with fund value. We extend the model to multiple yearly evaluation periods and find her risk-taking is rapidly moderated if the fund performs reasonably well. The most realistic approach to modeling fund closure uses an endogenous shutdown barrier where the manager optimally chooses to shut down. The manager increases risk-taking as fund value approaches that barrier, and this boundary behavior persists strongly with multiyear horizons.

Keywords: Hedge Fund; Management; Incentive (search for similar items in EconPapers)
JEL-codes: G00 G23 (search for similar items in EconPapers)
Date: 2006-05-10
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Citations: View citations in EconPapers (3)

Published in Journal of Financial and Quantitative Analysis 4.42(2007): pp. 811-826

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Journal Article: Incentive Contracts and Hedge Fund Management (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:11632

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