Optimal risk taking under high-water mark contract with jump risk

Mu, Congming; Yan, Jingzhou; Liang, Zhonghua

doi:10.1016/j.frl.2020.101460

Cited by 5 publications

(2 citation statements)

References 15 publications

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“…( 2018 ) and Mu et al. ( 2021 ). He and Kou ( 2018 ) propose an analytical framework to compute and compare two managerial incentive schemes for hedge funds by assuming cumulative prospect theory (CPT) preferences for the manager, Zhao et al.…”

Section: Introductionmentioning

confidence: 95%

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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: Introductionmentioning

confidence: 95%

“…( 2018 ) focus on the stochastic market conditions and Mu et al. ( 2021 ) take jump risk into account.…”

Section: Introductionmentioning

confidence: 99%