Incentives and Risk Taking in Hedge Funds

2013 ◽  
pp. 45-53
Keyword(s):  
Risk Taking ◽  
Hedge Funds

Derivatives Use and Risk Taking: Evidence from the Hedge Fund Industry

2011 ◽  
Vol 46 (4) ◽  
pp. 1073-1106 ◽  
Author(s):  
Yong Chen
Keyword(s):  
Risk Reduction ◽  
Risk Taking ◽  
Hedge Funds ◽  
Hedge Fund ◽  
Market Risk ◽  
Risk Shifting ◽  
Large Sample ◽  
Event Risk ◽  
Market State ◽  
Fund Industry

AbstractThis paper examines the use of derivatives and its relation with risk taking in the hedge fund industry. In a large sample of hedge funds, 71% of the funds trade derivatives. After controlling for fund strategies and characteristics, derivatives users on average exhibit lower fund risks (e.g., market risk, downside risk, and event risk), such risk reduction is especially pronounced for directional-style funds. Further, derivatives users engage less in risk shifting and are less likely to liquidate in a poor market state. However, the flow-performance relation suggests that investors do not differentiate derivatives users when making investing decisions.

scholarly journals Opacity in Hedge Funds: Does it Create Value for Investors and Managers?

2020 ◽  
Vol 17 (6) ◽  
pp. 640-668
Author(s):  
Flávia Januzzi ◽  
Aureliano Bressan ◽  
Fernando Moreira
Keyword(s):  
Value Creation ◽  
Risk Taking ◽  
Hedge Funds ◽  
Hedge Fund ◽  
Portfolio Allocation ◽  
Positive Relation ◽  
Monthly Basis ◽  
Comprehensive Database ◽  
Performance Fees

This paper investigates if opacity (as measured by derivatives usage) creates value for investors and the managers of hedge funds that charge performance fees. Since we do not identify a positive relation between opacity and managers’ revenue, it is not possible to state that opacity is a source of manager’s value creation for hedge fund investors and managers. However, considering that opacity is positively associated with risk-taking and negatively related with investors’ adjusted returns, we suggest policies aiming at protecting investors, especially those less qualified. We examine a unique and comprehensive database related to the positions in derivatives taken by managers, which was enabled due to specific disclosure regulatory demands of the Brazilian Securities Exchange Commission, where detailed information on hedge funds’ portfolio allocation should be provided on a monthly basis.

Compensation and Incentives in Hedge Funds

2017 ◽  
Author(s):  
Garrett C. C. Smith ◽  
Gaurav Gupta
Keyword(s):  
Risk Taking ◽  
Hedge Funds ◽  
Bargaining Power ◽  
Hedge Fund ◽  
High Water ◽  
Fund Managers ◽  
Fee Structure ◽  
Relative Bargaining Power ◽  
Structure Research ◽  
Subsequent Risk

Although hedge funds typically report a 2 and 20 fee structure, some investors want to change this standard practice. Many funds sustained substantial losses as a result of the financial crisis of 2007–2008. Given the strategies used by hedge funds, they were not supposed to incur large losses. Subsequent underperformance to equity during the bull market recovery left many investors questioning the fee structure. Research shows the fee structure is more fluid than typically reported. The reluctance of many hedge fund managers to appear weak perpetuates the reported 2 and 20 fee structure. Fees respond to the relative bargaining power between managers and investors. Some investors speculate that the fee structure encourages managers to undertake high-risk strategies. However, fees and other incentive provisions, such as a high-water mark, provide better opportunities for talented managers to enter the industry, mitigating their subsequent risk-taking.

Hedge Funds and Limited Partnership Agreements

2021 ◽  
pp. 86-110
Author(s):  
Na Dai
Keyword(s):  
Financial Crisis ◽  
Current Literature ◽  
Risk Taking ◽  
Hedge Funds ◽  
Hedge Fund ◽  
Fund Performance ◽  
2008 Financial Crisis ◽  
Limited Partnership ◽  
Fund Managers ◽  
The 2008 Financial Crisis

Due to the lack of regulations in the hedge fund industry and the great discretion given to hedge fund managers during the daily operations, limited partnership agreements are the most important if not the only tool for investors to incentivize and monitor hedge fund managers and protect their own interests. This chapter reviews the current literature on hedge funds contractual terms and their implications for fund performance and risk taking, before discussing the variation of the contracts conditional on the jurisdiction of the hedge fund. Finally, the development of hedge funds limited partnership agreements is investigated as many jurisdictions have imposed new regulations on hedge funds after the 2008 financial crisis.

Incentives and Risk Taking in Hedge Funds

2004 ◽  
Author(s):  
Roy R. P. Kouwenberg ◽  
William T. Ziemba
Keyword(s):  
Risk Taking ◽  
Hedge Funds

scholarly journals Felfedezni a fedezetlent? – Körkép hedge fundokban rejlő lehetőségekről és kockázatokról

2015 ◽  
Vol 12 (3-4) ◽  
pp. 3-19
Author(s):  
Zsolt Bujtár ◽  
András Kecskés
Keyword(s):  
Financial Crisis ◽  
Risk Taking ◽  
Hedge Funds ◽  
Legal Regulation ◽  
Market Participants ◽  
The World ◽  
The Future ◽  
Regulatory Reforms

The first thing that comes to one’s mind about hedge funds is risk taking and excelled level of profitability. However, the operation of hedge funds is a disputed and sometimes contradicted process and market participants often express their doubt about the effects of the phenomenon. Therfore, the role of legal regulation is crucial at this field. Avoiding the effect of the afore mentioned regulations is however still intended by many funds that operate all over the world. This paper intends to offer a deeper insight in to the world of hedge funds and the regulatory background. In light of the 2007-2009 financial crisis the topic seems to be evergreen and the future of hedge funds largely depends on the application of the regulatory reforms based on the recent experiences.

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