When the absence of incentive fees can give investors an Olympic-sized headache
| Aug 27th, 2008 | Filed under: Academic Research, Investment Management Fees, Today's Post | By: Alpha Male |
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Although the Olympics is an “amateur” athletic event, many athletes get one time bonuses from their government or corporate sponsors if they do well. In part, such incentives are designed to ensure the athlete doesn’t just go the games to have a good time. While the Olympic festivities are an experience in their own right, many other athletes with such incentives often forgo competitions if winning seems out of reach or a pyrrhic victory is likely (take, for example, tennis players who skip tournaments to rest a nagging injury or recuperate after weeks of competition).
The incentive to win – whether financial or purely psychological – is arguable what separates athletes from entertainers or performers. But are incentive fees also valuable in asset management?
A hedge fund incentive fee is often referred to as a “free option”. In a 2001 article for the Journal of Alternative Investments, Mark Anson described it this way:
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