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Performance fees and hedge fund return dynamics

Darolles, Serge; Gouriéroux, Christian (2015), Performance fees and hedge fund return dynamics, International Journal of Approximate Reasoning, 65, p. 45-58. 10.1016/j.ijar.2015.03.006

Type
Article accepté pour publication ou publié
Date
2015-03
Journal name
International Journal of Approximate Reasoning
Volume
65
Publisher
Elsevier
Pages
45-58
Publication identifier
Metadata
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Author(s)
Darolles, Serge
Dauphine Recherches en Management [DRM]
Gouriéroux, Christian
Abstract (EN)
A characteristic of hedge funds is not only an active portfolio management, but also the allocation of portfolio performance between different accounts, which are the accounts for the external investors and an account for the management firm, respectively. Despite lack of transparency in hedge fund market, the strategy of performance allocation is publicly available. This paper shows that, for the High-Water Mark Scheme, these complex performance allocation strategies might explain empirical facts observed in hedge fund returns, such as return persistence, skewed return distribution, bias ratio, or implied increasing risk appetite.
Subjects / Keywords
Hedge funds; Performance fees; Manager incentive; Risk appetite; High water mark
JEL
G11 - Portfolio Choice; Investment Decisions
G23 - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
G24 - Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies