Incentive Contracts and Hedge Fund Management: a Numerical Evaluation Procedure

42 Pages Posted: 15 Mar 2007

See all articles by James E. Hodder

James E. Hodder

Wisconsin School of Business

Jens Carsten Jackwerth

University of Konstanz - Department of Economics

Date Written: September 15, 2003

Abstract

The behavior of a hedge-fund manager naturally depends on her compensation scheme, her preferences, and constraints on her risk-taking. We propose a numerical method which can be used to analyze the impact of these influences. The model leads to several interesting and novel results concerning her risk-taking and other managerial decisions. We are able to relate our results to partial results in the literature and show how they fit in a more general context. We also allow the manager to voluntarily shut down the fund as well as enhancing the fund's Sharpe Ratio through additional effort. Both these extensions generate additional insights. Throughout the paper, we find that even slight changes in the compensation structure or the extent of managerial discretion can lead to drastic changes in her risk-taking.

Suggested Citation

Hodder, James Ernest and Jackwerth, Jens Carsten, Incentive Contracts and Hedge Fund Management: a Numerical Evaluation Procedure (September 15, 2003). Available at SSRN: https://ssrn.com/abstract=451140 or http://dx.doi.org/10.2139/ssrn.451140

James Ernest Hodder (Contact Author)

Wisconsin School of Business ( email )

975 University Avenue
Madison, WI 53706
United States
608-262-8774 (Phone)
608-263-0477 (Fax)

Jens Carsten Jackwerth

University of Konstanz - Department of Economics ( email )

Universitaetsstr. 10
Konstanz, 78457
Germany
+497531882196 (Phone)
+497531883120 (Fax)

HOME PAGE: http://cms.uni-konstanz.de/wiwi/jackwerth/

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