TY - JOUR
T1 - Tournament behavior in hedge funds
T2 - High-water marks, fund liquidation, and managerial stake
AU - Aragon, George
AU - Nanda, Vikram
PY - 2012/3
Y1 - 2012/3
N2 - We analyze whether risk shifting by a hedge fund manager is related to the manager's incentive contract, personal capital stake, and the risk of fund closure. We find that the propensity to increase risk following poor performance is significantly weaker when incentive pay is tied to the fund's high-water mark and when funds face little immediate risk of liquidation. Risk shifting is also less prevalent when a manager has a significant amount of personal capital invested in the fund. Overall, high-water mark provisions, managerial stake, and low risk of fund closure appear to make a hedge fund manager more conservative with regard to risk shifting.
AB - We analyze whether risk shifting by a hedge fund manager is related to the manager's incentive contract, personal capital stake, and the risk of fund closure. We find that the propensity to increase risk following poor performance is significantly weaker when incentive pay is tied to the fund's high-water mark and when funds face little immediate risk of liquidation. Risk shifting is also less prevalent when a manager has a significant amount of personal capital invested in the fund. Overall, high-water mark provisions, managerial stake, and low risk of fund closure appear to make a hedge fund manager more conservative with regard to risk shifting.
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U2 - 10.1093/rfs/hhr111
DO - 10.1093/rfs/hhr111
M3 - Review article
AN - SCOPUS:84857584921
SN - 0893-9454
VL - 25
SP - 937
EP - 974
JO - Review of Financial Studies
JF - Review of Financial Studies
IS - 3
ER -