High-Water Marks: High Risk Appetites? Convex Compensation, Long Horizons, and Portfolio Choice

• 成果类型: Article
• 署名作者: Panageas, Stavros; Westerfield, Mark M.
• 署名单位: University of Pennsylvania; University of Southern California
• 刊物名称: JOURNAL OF FINANCE
• ISSN/ISSBN: 0022-1082
• DOI: 10.1111/j.1540-6261.2008.01427.x
• 发表日期: 2009
• 页码: 1-36
• 关键词: INTERTEMPORAL PREFERENCES; continuous-time; consumption; strategies; management

摘要

We study the portfolio choice of hedge fund managers who are compensated by high-water mark contracts. We find that even risk-neutral managers do not place unbounded weights on risky assets, despite option-like contracts. Instead, they place a constant fraction of funds in a mean-variance efficient portfolio and the rest in the riskless asset, acting as would constant relative risk aversion (CRRA) investors. This result is a direct consequence of the in(de)finite horizon of the contract. We show that the risk-seeking incentives of option-like contracts rely on combining finite horizons and convex compensation schemes rather than on convexity alone.