Hedge fund fee incentives and risk
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: