Risking or De-Risking: How Management Fees Affect Hedge Fund Risk-Taking Choices
110 Pages Posted: 17 Jan 2017 Last revised: 28 Mar 2022
Date Written: March 26, 2022
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: Suggested Citation