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Probability and Computational Finance Seminar
David Saunders
University of Waterloo
Title: Mathematical Analysis of Shared-Loss Fee Structures for Hedge Funds

Abstract: Traditional fee structures for hedge funds involve a flat fee expressed as a percentage of assets under management, together with a performance fee that has the structure of a call option. This structure has disadvantages for investors both in terms of expenses, as well as the incentives it provides for hedge fund managers. We will discuss a new fee structure that has been adopted by some funds in the industry, referred to as the shared-loss fee structure. In this framework, in return for receiving upside participation, the fund manager provides some downside protection against losses to the investors. We show that this fee structure can be formulated as a portfolio of options, and discuss the resulting optimal stopping problem of determining the optimal time for an investor to withdraw from the structure.

Date: Monday, March 21, 2016
Time: 4:30 pm
Location: Wean Hall 8220
Submitted by:  Kasper Larsen