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Incentives from Compensation Option and Risk-Taking - Hedge Funds

Posted: 23 Mar 2007  

Ying Li

University of Washington, Bothell - Business

Hossein B. Kazemi

University of Massachusetts at Amherst - Isenberg School of Management

Date Written: January 5, 2007

Abstract

With a new proxy for the compensation option to hedge funds management, we explore the managerial incentives and risk-taking behavior for an extended sample of hedge funds. We focus on the incentives in response to the compensation option as discussed in Goetzmann, Ingersoll, and Ross (2003), and to relative performance in a 'tournament' as proposed by Brown, Harlow, and Starks (1996). We find that managers do respond to the "moneyness" of their compensation option and the length of time a fund has stayed under-water by shifting their volatility strategies. We find that size, age, as well as management fee level all play a role in affecting this response. On the other hand, funds are also found to respond to relative performance as described in the 'tournament' theory.

Keywords: managerial incentive, option

JEL Classification: G11, G12

Suggested Citation

Li, Ying and Kazemi, Hossein B., Incentives from Compensation Option and Risk-Taking - Hedge Funds (January 5, 2007). Available at SSRN: https://ssrn.com/abstract=971831

Ying Li (Contact Author)

University of Washington, Bothell - Business ( email )

18115 Campus Way NE
Bothell, WA 98011-8246
United States

Hossein B. Kazemi

University of Massachusetts at Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States

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