Estimating fees for managed futures: a continuous-time model with a knockout feature
Past 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.
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.
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.
Volume (Year): 7 (2000)
Issue (Month): 2 ()
|Contact details of provider:|| Web page: http://www.tandfonline.com/RAMF20|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/RAMF20|
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.:
- Mark Grinblatt & Sheridan Titman, "undated".
"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.
- 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-.
- 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.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:taf:apmtfi:v:7:y:2000:i:2:p:115-125. 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: (Michael McNulty)
If references are entirely missing, you can add them using this form.