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High-Water Marks and Hedge Fund Management Contracts

Author

Listed:
  • William N. Goetzmann

    (Yale University, School of Management)

  • Jonathan E. Ingersoll Jr.

    (School of Management)

  • Stephen A. Ross

    (Sloan School of Management)

Abstract

Incentive or performance fees for money managers are frequently accompanied by high-water mark provisions which condition the payment of the performance fee upon exceeding the maximum achieved share value. In this paper, we show that hedge fund performance fees are valuable to money managers, and conversely represent a claim on a significant proportion of investor wealth. The high-water mark provisions in these contracts limit the value of the performance fees. We provide a closed-form solution to the high-water mark
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • 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.
    • Handle: RePEc:ysm:somwrk:ysm186
    as

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    References listed on IDEAS

    as
    1. Jennifer N. Carpenter, 2000. "Does Option Compensation Increase Managerial Risk Appetite?," Journal of Finance, American Finance Association, vol. 55(5), pages 2311-2331, October.
    2. William N. Goetzmann & Nadav Peles, 1997. "Cognitive Dissonance And Mutual Fund Investors," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 20(2), pages 145-158, June.
    3. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
    4. Fung, William & Hsieh, David A., 1999. "A primer on hedge funds," Journal of Empirical Finance, Elsevier, vol. 6(3), pages 309-331, September.
    5. Fung, William & Hsieh, David A., 2000. "Performance Characteristics of Hedge Funds and Commodity Funds: Natural vs. Spurious Biases," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(3), pages 291-307, September.
    6. Ingersoll, Jonathan E, Jr, 2000. "Digital Contracts: Simple Tools for Pricing Complex Derivatives," The Journal of Business, University of Chicago Press, vol. 73(1), pages 67-88, January.
    7. William N. Goetzmann & Nadav Peles, 1997. "Cognitive Dissonance And Mutual Fund Investors," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 20(2), pages 145-158, June.
    8. Fung, William & Hsieh, David A, 1997. "Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 275-302.
    Full references (including those not matched with items on IDEAS)

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    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services

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