Risking or De-Risking: How Management Fees Affect Hedge Fund Risk-Taking Choices

110 Pages Posted: 17 Jan 2017 Last revised: 28 Mar 2022

See all articles by Chengdong Yin

Chengdong Yin

Renmin University of China - School of Finance

Xiaoyan Zhang

Tsinghua University - PBC School of Finance

Date Written: March 26, 2022

Abstract

Hedge fund managers’ risk-taking choices are influenced by their compensation structure. While most studies focus on incentive fees and the high-water mark, we examine how management fees affect managers’ risk-taking. We build a simple model to show that managers’ risk-taking is negatively related to their future management fees. Using fund-level data, we find that future management fees are the dominant component of managers’ total compensation. When the contribution of future management fees increases, managers reduce risk-taking to increase survival probabilities. Moreover, funds with higher decreasing returns to scale are more sensitive to future management fees and reduce risk-taking even more.

Keywords: Hedge Fund, Risk-Taking, Incentive Fee, Management Fee, High-Water Mark

JEL Classification: G20, G23, G29

Suggested Citation

Yin, Chengdong and Zhang, Xiaoyan, Risking or De-Risking: How Management Fees Affect Hedge Fund Risk-Taking Choices (March 26, 2022). PBCSF-NIFR Research Paper, Available at SSRN: https://ssrn.com/abstract=2899834 or http://dx.doi.org/10.2139/ssrn.2899834

Chengdong Yin (Contact Author)

Renmin University of China - School of Finance ( email )

Ming De Main Building
Renmin University of China
Beijing, Beijing 100872
China

Xiaoyan Zhang

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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