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High‐Water Marks and Hedge Fund Management Contracts
Open accessAbstract
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.
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Citations
Cited by
Role of Managerial Incentives and Discretion in Hedge Fund Performance
AGARWAL, V., DANIEL, N. D., & NAIK, N. Y. (2009) · The Journal of Finance · doi:10.1111/j.1540-6261.2009.01499.x · Cited by 688
Survival, Look-Ahead Bias, and Persistence in Hedge Fund Performance
Baquero, G., ter Horst, J., & Verbeek, M. (2005) · Journal of Financial and Quantitative Analysis · doi:10.1017/s0022109000001848 · Cited by 305
(2004) · Cited by 261
The performance of emerging hedge funds and managers☆
Aggarwal, R. K., & Jorion, P. (2010) · Journal of Financial Economics · doi:10.1016/j.jfineco.2009.12.010 · Cited by 258
Local Journalism under Private Equity Ownership
Ewens, M., Gupta, A., & Howell, S. T. (2021) · SSRN Electronic Journal · doi:10.2139/ssrn.3939405 · Cited by 21
Metadata
- Authors
- Goetzmann, W. N., Ingersoll, J. E., & Ross, S. A.
- Venue
- The Journal of Finance
- Publisher
- Wiley
- Published
- 2003-07-15
- Volume
- 58
- Issue
- 4
- Pages
- 1685-1718
- ISSN
- 0022-1082 (ISSN-L)
- 1540-6261
- OpenAlex
- W3121909572
- Cited by
- 595
- References
- 0
- FWCI
- 30.36
- Type
- journal article
- Language
- en
- Open access
- green
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- Goetzmann, W. N., Ingersoll, J. E., & Ross, S. A. (2003). High‐Water Marks and Hedge Fund Management Contracts. The Journal of Finance. https://doi.org/10.1111/1540-6261.00581
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Semantic Scholar’s data is described in: Kinney, R., et al. (2023). The Semantic Scholar Open Data Platform. arXiv:2301.10140.
