IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

High-Water Marks and Hedge Fund Management Contracts with Partial Information

  • Dandan Song

    ()

  • Jinqiang Yang

    ()

  • Zhaojun Yang

    ()

Registered author(s):

    This paper extends the Goetzmann et al. (J Financ 58:1685–1717, 2003 ) model to the case of partial information, where the expected return of a hedge fund is not observable but known to be either high or low. The fund manager can dynamically update his belief about the true value of the expected return based on the realization of the net asset value of the hedge fund. Our main purpose is to study the impact of the uncertainty of the expected return on the pricing of the fund manager’s various fees and the investor’s claim. The results show that partial information has significant impact on the values of the fees and the claim. Specifically, a non-updating fund manager always underestimate the values, and more often than not, the amount underestimated is very significant. The closer the net asset value gets to the high-water mark or the larger the uncertainty of the expected return is, the bigger the amount underestimated will become. Copyright Springer Science+Business Media New York 2013

    If 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.

    File URL: http://hdl.handle.net/10.1007/s10614-012-9338-7
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Society for Computational Economics in its journal Computational Economics.

    Volume (Year): 42 (2013)
    Issue (Month): 3 (October)
    Pages: 327-350

    as
    in new window

    Handle: RePEc:kap:compec:v:42:y:2013:i:3:p:327-350
    Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=100248

    More information through EDIRC

    References listed on IDEAS
    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.:

    as in new window
    1. 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.
    2. Carl Ackermann & Richard McEnally & David Ravenscraft, 1999. "The Performance of Hedge Funds: Risk, Return, and Incentives," Journal of Finance, American Finance Association, vol. 54(3), pages 833-874, 06.
    3. Mila Getmansky & Andrew W. Lo & Igor Makarov, 2003. "An Econometric Model of Serial Correlation and Illiquidity in Hedge Fund Returns," NBER Working Papers 9571, National Bureau of Economic Research, Inc.
    4. 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.
    5. Jinqiang Yang & Zhaojun Yang, 2012. "Consumption Utility-Based Pricing and Timing of the Option to Invest with Partial Information," Computational Economics, Society for Computational Economics, vol. 39(2), pages 195-217, February.
    6. 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.
    7. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, June.
    8. Vikas Agarwal, 2004. "Risks and Portfolio Decisions Involving Hedge Funds," Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 63-98.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:kap:compec:v:42:y:2013:i:3:p:327-350. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn)

    or (Christopher F. Baum)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.