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Hedge Fund Manager-Investor Conflicts of Interest: A Numerical Analysis with Loss-Aversion
Norwegian University of Science and Technology, Faculty of Social Sciences and Technology Management, Department of Industrial Economics and Technology Management.
2014 (English)MasteroppgaveStudent thesis
Abstract [en]

This thesis investigates the dynamically optimal risk-taking by a loss-averse hedge fund manager who also takes the possibility of fund liquidation into account. To achieve this, a custom version of the Prospect Theory utility-function is deployed. Furthermore, the effects yielded by different variations of the standard hedge fund contract on managerial incentives are examined. With a single-period horizon, the manager portrays complex risk-taking that varies considerably with fund value and time. In some regions of the state space, the manager pursues excessively high risk-levels relative to those a loss-averse investor. The incentive fee option is found to be the main source of the resulting conflict of interest between manager and investor. Conversely, managerial fund share is identified as a powerful tool of interest alignment. I also extend the manager's horizon to stretch over multiple evaluation periods, and find that overall managerial risk-taking is a decreasing function of the horizon. Finally, the cost of hedge fund investing is assessed, with particular focus attributed to incentive fees.

Place, publisher, year, edition, pages
Institutt for industriell økonomi og teknologiledelse , 2014. , 61 p.
URN: urn:nbn:no:ntnu:diva-25897Local ID: ntnudaim:11016OAI: diva2:742107
Available from: 2014-08-30 Created: 2014-08-30 Last updated: 2014-08-30Bibliographically approved

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