Finance and Stochastics

, Volume 19, Issue 3, pp 473–507 | Cite as

Hedge and mutual funds’ fees and the separation of private investments



A fund manager invests both the fund’s assets and own private wealth in separate but potentially correlated risky assets, aiming to maximize expected utility from private wealth in the long run. If relative risk aversion and investment opportunities are constant, we find that the fund’s portfolio depends only on the fund’s investment opportunities, and the private portfolio only on private opportunities. This conclusion is valid both for a hedge fund manager, who is paid performance fees with a high-water mark provision, and for a mutual fund manager, who is paid management fees proportional to the fund’s assets. The manager invests earned fees in the safe asset, allocating remaining private wealth in a constant-proportion portfolio, while the fund is managed as another constant-proportion portfolio. The optimal welfare is the maximum between the optimal welfares of each investment opportunity, with no diversification gain. In particular, the manager does not use private investments to hedge future income from fees.


Hedge funds Portfolio choice High-water marks Performance fees Management fees 

Mathematics Subject Classification (2010)

91G10 91G80 

JEL Classification

G11 G12 


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Copyright information

© Springer-Verlag Berlin Heidelberg 2015

Authors and Affiliations

  1. 1.Department of Mathematics and StatisticsBoston UniversityBostonUSA
  2. 2.School of Mathematical SciencesDublin City UniversityDublin 9Ireland
  3. 3.Department of MathematicsUniversity of Michigan at Ann ArborAnn ArborUSA

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