Asset Illiquidity and High-water Marks
In this paper we provide a rationale for the use of high-water mark provisions to adjust the performance fees of investment managers. In our model, illiquid assets exhibit return reversals, where interim losses are followed by larger gains. Liquidation risk thus arises because investors may prematurely withdraw their capital and pursue outside opportunities. A high-water mark precludes existing investors from paying performance fees until past losses have been recovered, thereby increasing the marginal cost of leaving the fund following poor performance. Consequently, a high-water mark allows managers of illiquid assets to retain investors when liquidation is most costly, and induces investors to commit their long-term capital for the fund. Using a large data set on hedge funds, we find that highwater marks are more common among funds investing in illiquid assets, as proxied by self-reported style categories, redemption restrictions, and return reversals.
hedge fund performance fee high-water mark fund flow illiquidity autocorrelation
George O. Aragon Jun QJ Qian
Department of Finance, W.P. Carey School of School, Arizona State University, Tempe, AZ 85287 Finance Department, Carroll School of Management, Boston College, Chestnut Hill, MA 02467
国际会议
昆明
英文
1-40
2005-07-05（万方平台首次上网日期，不代表论文的发表时间）