Abstract

http://ssrn.com/abstract=1030288
 
 

Citations



 


 



Incentives and Risk Taking in Hedge Funds


Roy Kouwenberg


Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Mahidol University - College of Management

William T. Ziemba


University of British Columbia (UBC) - Sauder School of Business


Journal of Banking and Finance, Vol. 31, No. 11, 2007

Abstract:     
We study how incentive fees and manager's own investment in the fund affect the investment strategy of hedge fund managers. We find that loss averse managers increase the risk of the fund's investment strategy with higher incentive fees. However, risk taking is greatly reduced if a substantial amount of the manager's own money (at least 30%) is in the fund. Using the Zurich hedge fund universe, we test the relation between risk taking and incentive fees empirically. Hedge funds with incentive fees have significantly lower mean returns (net of fees), while downside risk is positively related to the incentive fee level. Fund of funds charging large incentive fees achieve relatively high mean returns, but with significantly higher risk as well.

Keywords: Hedge funds, Incentive fees, Optimal portfolio choice

JEL Classification: G10, G29

Accepted Paper Series





Not Available For Download

Date posted: November 16, 2007  

Suggested Citation

Kouwenberg, Roy and Ziemba, William T., Incentives and Risk Taking in Hedge Funds. Journal of Banking and Finance, Vol. 31, No. 11, 2007. Available at SSRN: http://ssrn.com/abstract=1030288

Contact Information

Roy R. P. Kouwenberg
Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )
P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands
HOME PAGE: http://people.few.eur.nl/kouwenberg
Mahidol University - College of Management ( email )
69 Vipawadee Rangsit Road
Bangkok, 10400
Thailand
HOME PAGE: http://www.cmmu.mahidol.ac.th/main/faculty/aroy.asp
William T. Ziemba (Contact Author)
University of British Columbia (UBC) - Sauder School of Business ( email )
2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-261-1343 (Phone)
604-263-9572 (Fax)
HOME PAGE: http://williamtziemba.com
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