Estimating fees for managed futures: a continuous-time model with a knockout feature
AbstractPast research regarding incentive fees based on high-water marks has developed models for the specific characteristics of hedge funds. These theoretical models have used either discrete time or a Black-Scholes type differential equation. However, for managed futures, high-water marks are measured more frequently than for hedge funds, so a continuous-time model for managed futures may be appropriate. A knockout feature is added to a continuous model, which is something unique to managed futures although it could also have some relevance to hedge funds. The procedures allow one to derive the distribution function for the fund's survival time, which has not been derived in past research. The distribution of the maximum until ruin is derived as well, and used to provide an estimate of expected incentive fees. An estimate of the expected fixed fee is also obtained. The model shows that the expected incentive fee would be maximized if all funds were invested in margins, but for total fees to be maximized in the presence of a knockout feature, less than half of the funds should be invested. This is precisely what fund managers do. This result suggests that designing a fund with incentive fees only may cause fund managers to adopt the highest leverage, and thus, highest risk possible.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.
Volume (Year): 7 (2000)
Issue (Month): 2 ()
Contact details of provider:
Web page: http://www.tandfonline.com/RAMF20
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- William N. Goetzmann & Jonathan E. Ingersoll, Jr. & Stephen A. Ross, 2004.
"High Water Marks,"
Yale School of Management Working Papers
ysm22, Yale School of Management.
- Jennifer Carpenter, 1997. "The Optimal Dynamic Investment Policy for a Fund Manager Compensated with an Incentive Fee," New York University, Leonard N. Stern School Finance Department Working Paper Seires 97-11, New York University, Leonard N. Stern School of Business-.
- William N. Goetzmann & Stephen J. Brown & James M. Park, 2004.
"Conditions for Survival: Changing Risk and the Performance of Hedge Fund Managers and CTAs,"
Yale School of Management Working Papers
ysm10, Yale School of Management.
- Stephen Brown, 1999. "Conditions for Survival: Changing Risk and the Performance of Hedge Fund Managers and CTAs," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-077, New York University, Leonard N. Stern School of Business-.
- Stephen Brown & William Goetzmann & James Park, 1998. "Conditions for Survival: Changing Risk and the Performance of Hedge Fund Managers and CTAs," Yale School of Management Working Papers ysm83, Yale School of Management, revised 01 Apr 2008.
- Mark Grinblatt & Sheridan Titman, . "Adverse Risk Incentives and the Design of Performance-Based Contracts," Rodney L. White Center for Financial Research Working Papers 21-88, Wharton School Rodney L. White Center for Financial Research.
- Mark Grinblatt & Sheridan Titman, 1989. "Adverse Risk Incentives and the Design of Performance-Based Contracts," Management Science, INFORMS, vol. 35(7), pages 807-822, July.
- A. Harri & B. W. Brorsen, 2004. "Performance persistence and the source of returns for hedge funds," Applied Financial Economics, Taylor & Francis Journals, vol. 14(2), pages 131-141.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty).
If references are entirely missing, you can add them using this form.