Explaining Hedge Fund Investment Styles by Loss Aversion

Arbeitspapier

Recent research reveals that hedge fund returns exhibit a range of different,possibly non-linear pay-off patterns. It is difficult to qualify all these patternssimultaneously as being rational in a traditional framework for optimal financial decisionmaking. In this paper we present a simple model based on loss aversion that can accommodatefor all of these pay-off structures in one unifying framework. We provide evidence thatloss-aversion is a likely assumption for management as well as investor preferences.Following the current empirical literature, we solve a static asset allocation problem thatincludes a nonlinear instrument. We show analytically that four different pay-off functionsmay be rationally optimal. The key parameter in determining which of these four to choosein a specific setting, is the financial planner's surplus. The notion of surplus connectshedge fund manager's incentive schemes with the idea of mental accounting as proposed inrecent behavioral finance research.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: Tinbergen Institute Discussion Paper ; No. 02-046/2

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Portfolio Choice; Investment Decisions ; Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors
• Thema: hedge funds ; performance measurement ; loss aversion ; behavioral finance ; Investmentfonds ; Hedging ; Kapitaleinkommen ; Anlageverhalten ; Risikoaversion ; Finanzanalyse ; Theorie ; Hedgefonds

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Siegmann, Arjen ; Lucas, André
• Ereignis: Veröffentlichung
• (wer): Tinbergen Institute
• (wo): Amsterdam and Rotterdam
• (wann): 2002

Weitere Informationen

• Handle: http://hdl.handle.net/10419/85973
• Letzte Aktualisierung: 10.03.2025, 11:44 MEZ