Locking In The Profits Or Putting It All On Black? An Empirical Investigation Into The Risk-Taking Behaviour Of Hedge Fund Managers

The ideal fee structure aligns the incentives of the investor with those of the fund manager. Mutual funds typically only charge a management fee which is a proportion of the funds under management. Hedge funds on the other hand generally change an incentive fee which is a fraction of the fund's return each year in excess of the high-water mark. The justification generally given for these incentive fees is that they provide the manager with the incentive to target absolute returns.