Tournament behavior in hedge funds: High-water marks, fund liquidation, and managerial stake

George Aragon, Vikram Nanda

Research output: Contribution to journalReview articlepeer-review

31 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)937-974
Number of pages38
JournalReview of Financial Studies
Volume25
Issue number3
DOIs
StatePublished - Mar 1 2012

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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