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The Effects of Management and Provision Accounts on Hedge Fund Returns - Part I : The High Water Mark Scheme

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  • Serge Darolles

    ()
    (Université Paris-Dauphine et CREST)

  • Christian Gouriéroux

    ()
    (CREST et Université de Toronto)

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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 a 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

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    Bibliographic Info

    Paper provided by Centre de Recherche en Economie et Statistique in its series Working Papers with number 2013-22.

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    Length: 31
    Date of creation: Sep 2013
    Date of revision:
    Handle: RePEc:crs:wpaper:2013-22

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    Related research

    Keywords: Hedge Fund; Sharpe Performance; Manager Incentive; Risk Appetite; High Water Mark;

    References

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    2. Darolles, Serge & Gourieroux, Christian & Jasiak, Joann, 2009. "L-performance with an application to hedge funds," Journal of Empirical Finance, Elsevier, vol. 16(4), pages 671-685, September.
    3. 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.
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    18. Edwin J. Elton & Martin J. Gruber & Christopher R. Blake, 2003. "Incentive Fees and Mutual Funds," Journal of Finance, American Finance Association, vol. 58(2), pages 779-804, 04.
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