Gambling or De-Risking: Hedge Fund Risk-Taking vs. Management Fees

68 Pages Posted: 17 Jan 2017 Last revised: 1 Apr 2019

See all articles by Chengdong Yin

Chengdong Yin

Purdue University - Krannert School of Management

Xiaoyan Zhang

Tsinghua University - PBC School of Finance

Date Written: March 29, 2019

Abstract

Lan, Wang and Yang (2013) propose a model for hedge fund risk-taking, and predict that high future management fees lead to reduced risk-taking, which is different from the conventional wisdom that hedge funds are aggressive risk-takers. Using hedge fund data from 1994 to 2015, we calibrate the present value of all managers’ future compensations, and find that the management fee is the major part of managers’ total stake. When the contribution of future management fees to managers’ total stake increases, fund managers, especially those of larger funds, de-risk to increase funds’ survival probabilities and thus protect their future fee incomes.

Keywords: Hedge Fund, Risk-Taking, Incentive Fee, Management Fee, High-Water Mark

JEL Classification: G20, G23, G29

Suggested Citation

Yin, Chengdong and Zhang, Xiaoyan, Gambling or De-Risking: Hedge Fund Risk-Taking vs. Management Fees (March 29, 2019). Available at SSRN: https://ssrn.com/abstract=2899834 or http://dx.doi.org/10.2139/ssrn.2899834

Chengdong Yin (Contact Author)

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Xiaoyan Zhang

Tsinghua University - PBC School of Finance

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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