FT pointed out interesting academic research on how the risk appetite of hedge fund managers seemingly changes in accordance with how close they are to the previous high of the fund: just short and they take more risk; way below they take less risk to limit losses; and well above the previous high they again take less risk.

Classic agency theory stuff in that it is hard trying to match manager (agent) incentives to investor (principal) – obviously topical given the current interest/criticism of bonus incentives at investment banks. Simple concept but (maybe surprisingly) hard to come up with schemes that work well. Abstract and link to download can be found at:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1031096