@article {Clare7, author = {Andrew D Clare and Nick Motson}, title = {Locking in the Profits or Putting It All on Black? An Empirical Investigation into the Risk-Taking Behavior of Hedge Fund Managers }, volume = {12}, number = {2}, pages = {7--25}, year = {2009}, doi = {10.3905/JAI.2009.12.2.007}, publisher = {Institutional Investor Journals Umbrella}, abstract = {The ideal fee structure aligns the incentives of the investor with those of the fund manager. Mutual funds typically only charge a management fee that is a proportion of the funds under management. Hedge funds, on the other hand, generally change an incentive fee that is a fraction of the fund{\textquoteright}s return each year in excess of the high-water mark. The justification generally given for these incentive fees is that they provide the manager with the incentive to target absolute returns. As these incentive fees can be considered a call option on the performance of the fund, it is possible that the managers{\textquoteright} incentives might vary according to the delta of this option. A number of articles have examined the optimal investment strategies of money managers in the presence of incentive fees within theoretical frameworks with seemingly conflicting results. Using a large database of hedge fund returns, the authors examine the risk taking behavior of hedge fund managers in response to both their past returns relative to their high-water mark and their past returns relative to their peer group. An attempt is made to reconcile these results with the theoretical frameworks proposed.TOPICS: Real assets/alternative investments/private equity, risk management, in portfolio management, performance measurement}, issn = {1520-3255}, URL = {https://jai.pm-research.com/content/12/2/7}, eprint = {https://jai.pm-research.com/content/12/2/7.full.pdf}, journal = {The Journal of Alternative Investments} }