Hedge and Mutual Funds' Fees and the Separation of Private Investments
AbstractA fund manager invests both the fund's assets and own private wealth in separate but potentially correlated risky assets, aiming to maximize expected utility from private wealth in the long run. If relative risk aversion and investment opportunities are constant, we find that the fund's portfolio depends only on the fund's investment opportunities, and the private portfolio only on private opportunities. This conclusion is valid both for a hedge fund manager, who is paid performance fees with a high-water mark provision, and for a mutual fund manager, who is paid management fees proportional to the fund's assets. The manager invests earned fees in the safe asset, allocating remaining private wealth in a constant-proportion portfolio, while the fund is managed as another constant-proportion portfolio. The optimal welfare is the maximum between the optimal welfare of each investment opportunity, with no diversification gain. In particular, the manager does not use private investments to hedge future income from fees.
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 InfoPaper provided by arXiv.org in its series Papers with number 1208.4799.
Date of creation: Aug 2012
Date of revision: Jan 2014
Contact details of provider:
Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-09-03 (All new papers)
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.:
- Jennifer Carpenter, 1999. "Does Option Compensation Increase Managerial Risk Appetite?," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-076, New York University, Leonard N. Stern School of Business-.
- Dumas, Bernard & Luciano, Elisa, 1991. " An Exact Solution to a Dynamic Portfolio Choice Problem under Transactions Costs," Journal of Finance, American Finance Association, vol. 46(2), pages 577-95, June.
- Stavros Panageas & Mark M. Westerfield, 2009. "High-Water Marks: High Risk Appetites? Convex Compensation, Long Horizons, and Portfolio Choice," Journal of Finance, American Finance Association, vol. 64(1), pages 1-36, 02.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators).
If references are entirely missing, you can add them using this form.