High-Water Marks and Hedge Fund Management Contracts
AbstractIncentive fees for money managers are frequently accompanied by high-water mark provisions that condition the payment of the performance fee upon exceeding the previously achieved maximum share value. In this paper, we show that hedge fund performance fees are valuable to money managers, and conversely, represent a claim on a significant proportion of investor wealth. The high-water mark provisions in these contracts limit the value of the performance fees. We provide a closed-form solution to the cost of the high-water mark contract under certain conditions. Our results provide a framework for valuation of a hedge fund management company. Copyright (c) 2003 by the American Finance Association.
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Bibliographic InfoArticle provided by American Finance Association in its journal The Journal of Finance.
Volume (Year): 58 (2003)
Issue (Month): 4 (08)
Other versions of this item:
- William N. Goetzmann & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2001. "High-Water Marks and Hedge Fund Management Contracts," Yale School of Management Working Papers ysm186, Yale School of Management.
- William Goetzmann & Jonathan Ingersoll & Stephen Ross, 1998. "High-Water Marks and Hedge Fund Management Contracts," Yale School of Management Working Papers ysm81, Yale School of Management, revised 01 Aug 2001.
- G2 - Financial Economics - - Financial Institutions and Services
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