Gambling or De-Risking: Hedge Fund Risk-Taking vs. Management Fees
68 Pages Posted: 17 Jan 2017 Last revised: 1 Apr 2019
Date Written: March 29, 2019
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: Suggested Citation