Title: | Risk Choice Under High-Water Marks |
Authors: | Drechsler, Itamar |
Issue Date: | 18-Nov-2011 |
Series/Report no.: | FIN-11-009 |
Abstract: | I provide a closed-form solution to the optimal dynamic risk choice of a fund man- ager who is compensated under a high-water mark contract. The manager's optimal risk choice varies with the distance between the fund's asset value and its high-water mark. Negative returns increase the manager's eective risk aversion (`de-leveraging') when the value of his outside option is low, termination is `strict', or management fees are high, and decrease his eective risk aversion (`gambling') otherwise. I show that in the absence of limits on risk taking, it is never optimal for a manager to walk away. When there are risk limits, walk-away can be optimal following losses. |
URI: | http://hdl.handle.net/2451/31320 |
Appears in Collections: | Finance Working Papers |
Files in This Item:
File | Description | Size | Format | |
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Risk_Choice_HWM.pdf | 428.69 kB | Adobe PDF | View/Open |
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