Working Paper: NBER ID: w6413
Authors: William N. Goetzmann; Jonathan Ingersoll Jr.; Stephen A. Ross
Abstract: Incentive fees for money managers are frequently accompanied by high-water mark provisions that condition the payment of the performance fee upon exceeding the previously achieved maximum share value. In this paper, we show that hedge fund performance fees are valuable to money managers, and conversely, represent a claim on a significant proportion of investor wealth. The high-water mark provisions in these contracts limit the value of the performance fees. We provide a closed-form solution to the cost of the high-water mark contract under certain conditions. Our results provide a framework for valuation of a hedge fund management company.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| highwater mark provisions (H84) | performance fees (G19) |
| performance fees (G19) | investor wealth (G11) |
| highwater mark provisions (H84) | costs associated with contracts (L14) |
| volatility of portfolio (G11) | trade-off between regular fees and highwater mark fees (G19) |
| highwater mark contracts (D86) | suboptimal investment strategies (G11) |
| highwater mark compensation structure (M52) | hedge funds (G23) |