High Water Marks

Incentive fees for money managers are frequently accompanied by high-water mark provisions that condition the payment of the performance fee upon exceeding the previously achieved maximum share value. In this paper, we show that hedge fund performance fees are valuable to money managers, and conversely, represent a claim on a significant proportion of investor wealth. The high-water mark provisions in these contracts limit the value of the performance fees. We provide a closed-form solution to the cost of the high-water mark contract under certain conditions. Our results provide a framework for valuation of a hedge fund management company.

Incentive Contracts and Hedge Fund Management

This paper investigates dynamically optimal risk-taking by an expected-utility maximizing manager of a hedge fund. We examine the effects of variations on a compensation structure that includes a percentage management fee, a performance incentive for exceeding a specified highwater mark, and managerial ownership of fund shares. In our basic model, there is an exogenous liquidation barrier where the fund is shut down due to poor performance. We also consider extensions where the manager can voluntarily choose to shut down the fund as well as to enhance the fund’s Sharpe Ratio through additional effort. We find managerial risk-taking which differs considerably from the optimal risk-taking for a fund investor with the same utility function. In some portions of the state space, the manager takes extreme risks. In another area, she pursues a lock-in style strategy. Indeed, the manager’s optimal behavior even results in a trimodal return distribution. We find that seemingly minor changes in the compensation structure can have major implications for risk-taking. Additionally, we are able to compare results from our more general model with those from several recent papers that turn out to be focused on differing parts of the larger picture.

Solutions for Impact Investors: From Strategy to Implementation

In writing this monograph, our main goal is to provide impact investors with tools to tighten the link between their investment decisions and impact creation. Our intent is threefold: to attract more capital to impact investing; to assist impact investors as they move from organizational change to executing and refining their impact investment decision-making process; and to narrow the gap within foundations between program professionals and investment professionals thereby contributing to a mutual understanding and implementation of a portfolio approach to impact investing.Additionally, we intend to help break down the barriers making it difficult to identify opportunities in impact investing. To this end, we provide examples throughout the monograph and at www.rockpa.org/impactinvesting of impact investment opportunities in most major asset classes.While we understand the important role that impact investors can play in providing financial capital, we also want to acknowledge the wide range of non-financial resources needed to address the world's problems. Our intent with this monograph is not to provide a comprehensive list of investments across asset classes nor any type of investment advice with regard to the selected profiles. We strongly encourage the reader to conduct their own assessment and evaluation for risk and suitability before considering any investment

W. M. Keck Foundation 2010 Annual Report

Contains board chair's message, 2010 program highlights and grantee profiles, grants list, financial statements, and lists of board members and committee members

Incentive Contracts and Hedge Fund Management: A Numerical Evaluation Procedure

The behavior of a hedge-fund manager naturally depends on her compensation scheme, her preferences, and constraints on her risk-taking. We propose a numerical method which can be used to analyze the impact of these influences. The model leads to several interesting and novel results concerning her risk-taking and other managerial decisions. We are able to relate our results to partial results in the literature and show how they fit in a more general context. We also allow the manager to voluntarily shutdown the fund as well as enhancing the fund’s Sharpe Ratio through additional effort. Both these extensions generate additional insights. Throughout the paper, we find that even slight changes in the compensation structure or the extent of managerial discretion can lead to drastic changes in her risk-taking.

Hedge fund seeding via fees-for-seed swaps under idiosyncratic risk

We develop a dynamic valuation model of the hedge fund seeding business by solving the consumption and portfolio-choice problem for a risk-averse manager who launches a hedge fund through a seeding vehicle. This vehicle, i.e. fees-for-seed swap, specifies that a strategic partner (seeder) provides a critical amount of capital in exchange for participation in the funds revenue. Our results indicate that the new swap not only solves the serious problem of widespread financing constraints for new and early-stage funds (ESFs) managers, but can be highly beneficial to both the manager and the seeder if structured properly

Financial Innovations Roundtable: Developing practical solutions to scale up integrated community development strategies

Essays from experts affiliated with the “think-do” tank , the Financial Innovations Roundtable, housed at the Carsey Institute at the University of New Hampshire

Maximizing Impact: An Integrated Strategy for Grantmaking and Mission Investing in Climate Change

With funding from The Surdna Foundation, FSG has developed this report to help foundations identify how various mission investing instruments and opportunities can help them create greater impact. Guided by an expert Advisory Board and based on interviews with more than 50 practitioners from the field, the report provides a framework for foundations to think about how mission investments can create the greatest impact when combined with grants in an integrated program portfolio, with a specific focus on climate change

Impact Investing: a primer for family offices

The goal of this report is to help family offices ask the right questions as they contemplate their path into impact investing. It is important to recognize that impact investing may not suit all investors. There will be family offices which conclude impact investing is not appropriate at this stage for them. While we are passionate about the potential of impact investing, we acknowledge the best future for the sector is where each investor can make informed choices about their own best interest. Each investor and investment institution needs to evaluate if impact investing fits with its needs, interests and unique context. It is with that in mind that we offer this report as a resource and tool that family offices can use to begin the conversations internally, to craft and design their own engagement strategy on impact investing with family members, advisers and potential investees, as well as to ensure that not only is their wealth growing in value, but also that their wealth can reflect their values