Business Commons^™

Three Essays On Hedge Fund Fee Structure, Return Smoothing And Gross Performance, Shuang Feng

Open Access Dissertations

Hedge funds feature special compensation structure compared to traditional investments. Previous studies mainly focus on the provisions and incentive structure of hedge fund contract, such as 2/20, hurdle rates, and high-water mark. The first essay develops an algorithm to empirically estimate the monthly fees, fund flows and gross asset values of individual hedge funds. We find that management fee is a major component in the dollar amount of hedge fund total fees, and fund flow is more important in determining the change in fund size compared to net returns, especially when fund is shrinking in size. We also find that …

Three Essays On Hedge Fund Fee Contracts, Managerial Incentives And Risk Taking Behaviors, Gong Zhan

Open Access Dissertations

Essay One

Under the principal-agent framework, we study and compare different compensation schemes commonly adopted by hedge fund and mutual fund managers. We find that the option-like performance fee structure prevalent among hedge funds is suboptimal to the symmetric performance fee structure. However, the use of high water mark (HWM) mitigates the suboptimality, though to a very limited extent. Bothour theoretical models and simulation results show that HWM will induce more managerial efforts only when a fund is slightly under the water but it will unfavorably dampen incentives when a fund is too deep under the water and when the …