Hedge and Mutual Funds' Fees and the Separation of Private Investments

34 Pages Posted: 23 Aug 2012 Last revised: 26 Oct 2014

See all articles by Paolo Guasoni

Paolo Guasoni

Boston University - Department of Mathematics and Statistics; Dublin City University - School of Mathematical Sciences; University of Bologna - Department of Statistics

Gu Wang

Worcester Polytechnic Institute

Date Written: October 22, 2014

Abstract

A fund manager invests both the fund's assets and own private wealth in separate but potentially correlated risky assets, aiming to maximize expected utility from private wealth in the long run. If relative risk aversion and investment opportunities are constant, we find that the fund's portfolio depends only on the fund's investment opportunities, and the private portfolio only on private opportunities. This conclusion is valid both for a hedge fund manager, who is paid performance fees with a high-water mark provision, and for a mutual fund manager, who is paid management fees proportional to the fund's assets. The manager invests earned fees in the safe asset, allocating remaining private wealth in a constant-proportion portfolio, while the fund is managed as another constant-proportion portfolio. The optimal welfare is the maximum between the optimal welfare of each investment opportunity, with no diversification gain. In particular, the manager does not use private investments to hedge future income from fees.

Keywords: hedge funds, portfolio choice, high-water marks, performance fees, management fees

JEL Classification: G11, G12

Suggested Citation

Guasoni, Paolo and Guasoni, Paolo and Wang, Gu, Hedge and Mutual Funds' Fees and the Separation of Private Investments (October 22, 2014). Available at SSRN: https://ssrn.com/abstract=2134832 or http://dx.doi.org/10.2139/ssrn.2134832

Paolo Guasoni (Contact Author)

Boston University - Department of Mathematics and Statistics ( email )

Boston, MA 02215
United States

Dublin City University - School of Mathematical Sciences ( email )

Dublin
Ireland

HOME PAGE: http://www.guasoni.com

University of Bologna - Department of Statistics ( email )

Bologna, 40126
Italy

Gu Wang

Worcester Polytechnic Institute ( email )

100 Institute Road
Worcester, MA 01609
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
190
Abstract Views
2,235
Rank
239,686
PlumX Metrics