Publication: Incentives and risk taking in hedge funds
Issued Date
2007-11-01
Resource Type
ISSN
03784266
Other identifier(s)
2-s2.0-35549005994
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Mahidol University
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SCOPUS
Bibliographic Citation
Journal of Banking and Finance. Vol.31, No.11 (2007), 3291-3310
Suggested Citation
Roy Kouwenberg, William T. Ziemba Incentives and risk taking in hedge funds. Journal of Banking and Finance. Vol.31, No.11 (2007), 3291-3310. doi:10.1016/j.jbankfin.2007.04.003 Retrieved from: https://repository.li.mahidol.ac.th/handle/20.500.14594/24428
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Title
Incentives and risk taking in hedge funds
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Abstract
We study how incentive fees and manager's own investment in the fund affect the investment strategy of hedge fund managers. We find that loss averse managers increase the risk of the fund's investment strategy with higher incentive fees. However, risk taking is greatly reduced if a substantial amount of the manager's own money (at least 30%) is in the fund. Using the Zurich hedge fund universe, we test the relation between risk taking and incentive fees empirically. Hedge funds with incentive fees have significantly lower mean returns (net of fees), while downside risk is positively related to the incentive fee level. Fund of funds charging large incentive fees achieve relatively high mean returns, but with significantly higher risk as well. © 2007 Elsevier B.V. All rights reserved.