RT Journal Article
SR Electronic
T1 Practical Applications of The Moral Hazard Problem in Hedge Funds: <em>A Study of Commodity Trading Advisors</em>
JF Practical Applications
FD Institutional Investor Journals
SP 1
OP 4
DO 10.3905/pa.2017.5.2.240
VO 5
IS 2
A1 Li Cai
A1 Marat Molyboga
A1 Chris (Cheng) Jiang
YR 2017
UL https://pm-research.com/content/5/2/1.9.abstract
AB Research shows that poorly performing hedge funds tend to engage in risk-shifting behavior—increasing volatility—to boost returns and, in turn, performance fees, especially when fee structures contain triggers such as high-water marks. In The Moral Hazard Problem in Hedge Funds: A Study of Commodity Trading Advisors , Li Cai , Chris (Cheng) Jiang, and Marat Molyboga demonstrate that the market environment affects risk-shifting behavior among hedge funds—less risk-shifting behavior occurs in unfavorable market environments, and vice versa. The study also provides new evidence linking investment strategy and risk choices. The authors find that although risk-shifting behavior can increase fees for managers, it lowers investors' risk-adjusted returns.