The high-water mark provision in hedge fund managers' compensation raises concerns of investors, because they are worried about that fund managers would take unnecessarily high risk in the fund investment. In this paper, we theoretically analyze the optimal strategies for hedge fund managers who choose to maximize the expected power utility from fees in both discrete-time and continuous- time models. The results show that when approaching the fee payment date, hedge fund managers would take as much risk as they are allowed to in the fund investment. However, if hedge fund managers are given more time, they tend to be more conservative. In the continuous-time model, the optimal allocation of the fund in the risky asset depends on market conditions, which are measured by the state price density.

Essay One Under the principal-agent framework, we study and compare different compensation schemes commonly adopted by hedge fund and mutual fund managers. We find that the option-like performance fee structure prevalent among hedge funds is suboptimal to the symmetric performance fee structure. However, the use of high water mark (HWM) mitigates the suboptimality, though to a very limited extent. Bothour theoretical models and simulation results show that HWM will induce more managerial efforts only when a fund is slightly under the water but it will unfavorably dampen incentives when a fund is too deep under the water and when the manager's skill is poor. Allowing managers to invest personal wealth in their own funds, however, helps align interests and provides positive managerial incentives. Essay Two Existing literature has detected a "tournament behavior" among mutual fund managers that mid-year underperformers tend to take relatively higher risk than peers in the second half-year. We reexamine this issue and provide empirical evidence that such behavior does not exist among hedge fund managers, either at fund level or risk style level. Instead, hedge fund managers shift risk at mid-year in response to the moneyness of their incentive contracts. Also, risk shifting decisions are more driven by underperformance than by outperformance. HighWater Mark can strongly rein in excess risk-taking and therefore better aligns interests. Last, risk shifting on average does not improve either performance, moneyness of incentive contracts, or cash inflows. Essay Three We use factor models and optimal change point regression models to capture the intra-year risk dynamics of hedge fund managers. Those risk shifting managers are further divided into 'Informed', 'Uninformed' and 'Misinformed' groups, according to their post-shifting risk adjusted performance. We find evidence that supports the existence of an Adverse Selection' problem of managers compensation schemes. Namely, incentive contracts, designed to share risks and align interests, induce the strongest risk taking from the least informed or skilled hedge fund managers, whose risk-shifting decisions result in undesired or even deteriorated risk-adjusted returns for investors. We also find that the High Water Mark has only limited influence on mitigating excessive risk shifting.

Submitted by Gustavo Gazaneo (guslisandro@uol.com.br) on 2010-05-07T18:16:17Z No. of bitstreams: 1 Tese Gustavo Gazaneo Final.pdf: 287923 bytes, checksum: 6602f92108a7ad4f9cfd0ec68fec5dd3 (MD5) / Approved for entry into archive by Gisele Gammaro(gisele.gammaro@fgv.br) on 2010-05-14T19:13:32Z (GMT) No. of bitstreams: 1 Tese Gustavo Gazaneo Final.pdf: 287923 bytes, checksum: 6602f92108a7ad4f9cfd0ec68fec5dd3 (MD5) / Made available in DSpace on 2010-05-14T19:23:50Z (GMT). No. of bitstreams: 1 Tese Gustavo Gazaneo Final.pdf: 287923 bytes, checksum: 6602f92108a7ad4f9cfd0ec68fec5dd3 (MD5) Previous issue date: 2006-07-31 / Using the international literature on mutual funds, the present study search to find some characteristics that influence the performance of the equity mutual funds in Brazil from January of 1999 to April of 2005. The main subject of the work is to notice that the equity mutual funds have decreasing return of scale. At the same time, the persistence of a good profitability depends on the degree of the managers' professionalism and also of a good relationship between the responsible manager and the investor, and a great contract betw een both. It was observed, through a regression using panel data, that the volume doesn't have negative influence in the return of the funds, on the contrary, as larger is the fund, better is the profitabil ity of the same. It was also observed that the funds that pay performance incentive to their managers have a better acting than the others. It was identified also that the equity mutual funds that use high water marks as a remuneration incentive to the managers, has profitability than the funds that pay performance, but they don't use the high water marks in the own regulation. It was found that there is a straight relationship between incentive and performance. The results at this study may be used to facilitate the knowledge and the new decisions of researchers, investors, company managers, Brokers and Dealers, pension funds and others interested parties in the industry of investment funds in Brazil. / Tendo como base a literatura internacional sobre fundos mútuos, o presente estudo busca encontrar algumas características que influenciam a performance dos fundos de investimentos em ações no Brasil de janeiro de 1999 até abril de 2005. O objetivo principal do trabalho é perceber se os fundos de investimento em ações têm retorno decrescente de escala. Ao mesmo tempo, sabe-se que a persistência de uma boa rentabilidade depende do grau de profissionalismo dos gestores e também de uma boa relação entre o gestor responsável e o investidor e, um contrato ótimo entre ambos. Observou-se que o volume não tem influência negativa no retorno do fundo, pelo contrário, quanto maior o fundo melhor é a rentabilidade do mesmo. Os resultados também apresentaram que os fundos que cobram taxa de performance têm um desempenho melhor do que os que não cobram. Foi identificado também que os fundos que utilizam a marca d água como incentivo de remuneração aos gestores têm rentabilidade um pouco maior do que os fundos que pagam taxa de performance, mas não utilizam a marca d água no regulamento. Chegou-se a conclusão que há uma relação direta entre incentivo e desempenho. Os resultados aqui encontrados buscam facilitar o conhecimento e a tomada de decisão de pesquisadores, investidores, empresas gestoras, Corretoras e Distribuidoras, fundos de pensão e dos demais interessados na indústria de fundos de investimento em ações no Brasil.

Abstract Purpose – The purpose of this thesis is to give the investors a better understanding on how to interpret the costs of funds with performance fee with high-water mark and give some guidelines when comparing funds with different fee structures, i.e. mutual funds and hedge funds. Mathematical approaches – Two mathematical approaches are used in the study. The first approach is to describe the high-water mark contract as a partial differential equation, which has the characteristics of Black-Scholes equation. The second approach is to numerically simulate the evolution of a fund’s value. During the development of the fund’s value the cost of the fees are calculated and discounted. Findings – It is found that the expected cost of the performance fee with high-water mark, vary a lot. An example is when the volatility increases the expected cost of performance fee drastically raises while the management fee is unchanged. Another interesting finding is that the order of when the fees’ are charged affects the expected cost of the performance fee. Conclusion – The guidelines for the investor is to invest in a fund with a performance fee in low volatile markets and a fund with just the management fee in high volatile markets. Another impact is the time step which the high-water mark level is controlled. The investor wants these controls as infrequently as possible. If the controls are done at a daily basis the expected cost of the performance fee is higher than in a monthly control. It is also concluded that the Normanbelopp of a fund with a performance fee should not be trusted. Key-words:

During the work of this research project we were interested in mathematical techniques that give us an insight to the following questions: How do we understand the trading decisions made by a manager of a hedge fund and what influences these decisions? In what way does an illiquid market affect these decisions and the performance of the fund? And how does the payment scheme affect the investor's decisions? Based on existing work on hedge fund management, we start with a fund that can be modelled with one risky investment and one riskless investment. Next, subject to the hedge fund special reward scheme we maximise the expected utility of wealth of the manager, by controlling the percentage invested in the risky investment, namely the portfolio. We use stochastic control techniques to derive a partial differential equation (PDE) and numerically obtain its corresponding viscosity solution, which provides a weak notion of solutions to these PDEs. This is then taken to a liquidity constrained scenario, to compare the behaviour of the two scenarios. Using the same approach as before we notice that due to the liquidity restriction we cannot use a simple model to combine the risky and riskless investments as a total amount, and hence the PDE is one order higher than before. We then model an investor who is investing in the hedge fund subject to the manager's optimal portfolio decisions, with similar mathematical tools as before. Comparisons between the investor's expected utility of wealth and the utility of having the money invested in the risk-free investment suggests that, in some cases, the investor is paying more to the manager than the return he is receiving for having invested in the hedge fund, compared to a risk-free investment. For that reason we propose a strategic game where the manager's action is to allocate the money between the two assets and the investor's action is to add money to the fund when he expects profit. The result is that the investor profits from the option to reinvest in the fund, although in some extreme cases the actions of the manager make the investor receive a negative value for having the option.

In Louisiana, the beds of natural lakes are owned by the state. The locations of property boundary lines separating state property from private lands have usually been set by determining the levels of natural monuments known as ordinary high water marks. The term is confusing and subjective, leading to controversy in reference to its determination. Catahoula Lake in central Louisiana was chosen as a study site because of its large size, its 20-foot variation in water levels, and its low-relief perimeter. Geology, geomorphology, hydrology, archaeology, vegetation, dendrochronology and dendrohydrology of the ancient cypress fringe, nineteenth century land survey records, historical records, and time-series statistics were applied to determine the elevation range of ordinary high water. Research suggests that the level of the ordinary high water natural monument used universally in Louisiana to define lake boundaries is not the correct natural monument. This research suggests that, for example, the natural monument that defines the Catahoula Lake boundary is not a vertical monument, but rather an areal monument that was originally recognized by nineteenth century U.S. government surveyors and embedded in the evidence extracted from their original field notes. The solution coincides with the boundaries of regional land patents and offers a consistent solution to determining the boundaries of thousands of acres of disputed lands. The procedure is applicable to other lake and swamp boundaries in Louisiana and other states.