Implicit Options in Hedge Fund Products

6 Pages Posted: 7 Jun 2015

See all articles by Hilary Till

Hilary Till

Premia Research LLC; EDHEC-Risk Institute; J.P. Morgan Center for Commodities, University of Colorado Denver Business School; Global Commodities Applied Research Digest

Joseph Eagleeye

Premia Research LLC

Date Written: January 27, 2003

Abstract

This brief paper discusses the option-like exposures of a number of hedge fund strategies based on a review of the literature on the topic. Specifically, recent academic articles have argued that implicit options arise in hedge fund products due to the following factors: (1) the tailoring of return-to-risk profiles to certain classes of investors, resulting in investments that have option-like payoff profiles; (2) the provision of real options by hedge fund investors who take on illiquid investments, allowing other investors the flexibility to readily liquidate their investments; and (3) the incentives given to hedge fund managers in their management contracts, which provide managers with option-like payoff profiles in terms of how they are paid for their services. Accordingly, the paper briefly covers the investor preferences, risk-transfer function, and manager incentives that lead to the implicit optionality embedded in hedge fund products.

Keywords: Hedge Funds, Option-like payoff

JEL Classification: G1, G11, G23

Suggested Citation

Till, Hilary and Eagleeye, Joseph, Implicit Options in Hedge Fund Products (January 27, 2003). Available at SSRN: https://ssrn.com/abstract=2614959 or http://dx.doi.org/10.2139/ssrn.2614959

Hilary Till (Contact Author)

Premia Research LLC ( email )

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HOME PAGE: http://customindices.spindices.com/custom-index-calculations/premia/all

EDHEC-Risk Institute

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HOME PAGE: http://risk.edhec.edu/

J.P. Morgan Center for Commodities, University of Colorado Denver Business School ( email )

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Denver, CO 80202
United States

HOME PAGE: http://www.business.ucdenver.edu/commodities

Global Commodities Applied Research Digest ( email )

J.P. Morgan Center for Commodities
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Denver, CO 80202
United States

HOME PAGE: http://www.jpmcc-gcard.com/hilary-till

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