Paper
Journal of Derivatives & Hedge Funds (2008) 13, 287–303. doi:10.1057/palgrave.jdhf.1850085
Incentives for asset growth: The different causes of monthly in-flows and out-flows of surviving managed futures funds
Practical applications
This work can benefit various communities within the alternative funds industry: academics, fund managers and fund allocators. From the perspective of academe, we have verified that assets growth and performance are linked. We have found a 'rational' model of monthly asset growth. Better forecasting of monthly asset growth is obtained by separating forecasts of asset in- and out-flows suggesting that different mechanisms drive them. A fund manager can use this study to isolate and focus upon those performance characteristics most important for monthly asset growth and hence, over time, increase the overall value of the fund. Finally, an asset allocator, CPO or fund of fund manager can use the model created in this study to identify managers which represent investment opportunities. If the manager has fewer assets under management than predicted, it may represent an allocation possibility. The allocator would also need to know what process and which markets were traded by the manager to gauge how fund returns would be adversely affected by increased assets under management.
Paul Lajbcygier1 and Eric Shen2
Correspondence: Paul, Lajbcygier, Department of Econometrics & Business Statistics, Department of Accounting & Finance, Monash University, Clayton, Victoria 3800, Australia. Tel: +61 3 99059694; Fax: +61 3 9905159; E-mail: Paul.Lajbcygier@BusEco.monash.edu.au
1Professor Paul Lajbcygier combines extensive industry and academic experience in investments. Since 1990, he has provided investment advice for various prominent domestic and international: funds managers, banks and hedge funds. He has published over 60 academic papers and generated over $3.1 million in government grants and payments in-kind since 1995. He has sat on over ten journal editorial boards and conference programme committees and has also worked/researched at some of the best business schools in the world, including London Business School and the Stem School of Business, New York University.
2Eric Shen completed his Masters under Paul Lajbcygier's supervision in 2006.
Received 27 November 2006; Revised 27 November 2006.
Abstract
The typical hedge fund incentive contract stipulates that 20 per cent of the profits are kept for the manager as an incentive to perform well: that is, provide large, persistent positive returns to investors. Rather than focusing on maximising their investor's wealth, managers may subvert this incentive scheme and focus on maximising assets under management instead. By doing so, managers may generate profits for themselves, even if their returns to their investors are small and do not persist. The aim of this work is to understand how a surviving manager may maximise monthly asset in-flow and minimise out-flow, and hence, maximise overall asset growth. Surprisingly, we find that non-return-based performance characteristics like fund age, relative performance, and fund size are key factors when forecasting monthly asset flow. Furthermore, we find that different causes of in- and out-flows exist.
Keywords:
alternative investments, asset growth, performance characteristics, general additive models
