Investor protection, hedge fund leverage and valuation

Bian, Yuxiang; Xiong, Xiong; Yang, Jinqiang

doi:10.1016/j.najef.2022.101710

Cited by 2 publications

(1 citation statement)

References 30 publications

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“…Our findings show that given the HWM contract, the fund manger’s ambiguity aversion also can decrease his risk taking, which is different from the effect arising from weak investor protection in that Bian et al. ( 2022 ) find that weak investor protection generates ambiguous effects on dynamic leverage choice. Ambiguity aversion also makes our paper differ from He and Kou ( 2018 ), Zhao et al.…”

Section: Introductioncontrasting

confidence: 78%

Robust risk choice under high-water mark contract

Yan

Yang

2023

Rev Quant Finan Acc

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By assuming that a risk-neutral hedge fund manager has ambiguous beliefs about the return process of risky asset, we study his robust risk choice under the high-water mark. The results show that without management fees, ambiguity aversion induces the manager to take more risk as the fund is close to the termination but take less risk as the fund approaches the high-water mark. With management fees, ambiguity aversion increases the induced risk aversion and moderates the manager’s incentive to take risk, predicting that it is the manager with higher rates of management fees that reduces the risky asset holdings more when he becomes less confident and/or more pessimistic about the future returns. The model implies that managers’ ambiguity aversion is a possible factor explaining hedge fund activities in stock markets during the financial crisis of 2007–2009 and in US Treasury markets during COVID-19 crisis. Finally, taxation is taken into account.

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Section: Introductioncontrasting

confidence: 78%