Robust leverage decision under locked wealth and high-water mark contract

作者：Luo, Deqing; Wu, Xiaoping; Xu, Jiawen; Yan, Jingzhou^*

来源：Finance Research Letters, 2022, 46: 102428.

DOI：10.1016/j.frl.2021.102428

• High-water mark
• Robust leverage
• Locked wealth
• Ambiguity

This paper investigates the effects of ambiguity on the optimal fund leverage and the private risk-taking of a hedge fund manager with a high-water mark contract and locked wealth in the fund. We derive a closed-form solution that predicts an increase in ambiguity about the market risk has a U-shaped effect on the optimal fund leverage but a monotonic decreasing effect on the private risk-taking. An increase in ambiguity about the idiosyncratic risk reduces the optimal fund leverage and raises the private risk-taking. According to the simulation, ambiguity erodes the fund wealth and the private wealth of the manager. Consumption-wealth ratio and welfare of the manager are both reduced as ambiguity increases.

• 单位
  四川大学