Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE credits
The purpose of this thesis is to give the investors a better understanding on how to
interpret the costs of funds with performance fee with high-water mark and give some guidelines
when comparing funds with different fee structures, i.e. mutual funds and hedge funds.
Mathematical approaches –
Two mathematical approaches are used in the study. The first
approach is to describe the high-water mark contract as a partial differential equation, which has
the characteristics of Black-Scholes equation. The second approach is to numerically simulate
the evolution of a fund’s value. During the development of the fund’s value the cost of the fees
are calculated and discounted.
– It is found that the expected cost of the performance fee with high-water mark, vary
a lot. An example is when the volatility increases the expected cost of performance fee
drastically raises while the management fee is unchanged. Another interesting finding is that the
order of when the fees’ are charged affects the expected cost of the performance fee.
– The guidelines for the investor is to invest in a fund with a performance fee in low
volatile markets and a fund with just the management fee in high volatile markets. Another
impact is the time step which the high-water mark level is controlled. The investor wants these
controls as infrequently as possible. If the controls are done at a daily basis the expected cost of
the performance fee is higher than in a monthly control. It is also concluded that the Normanbelopp
of a fund with a performance fee should not be trusted.
2013. , 66 p.