An incentive for risk?

The recent spate of hedge fund frauds has focused attention on the differing incentives of hedge fund managers and investors. Are performance-based compensation structures pushing hedge fund managers into excessive risk-taking? Barry Schachter finds out

The mainstream press loves to highlight instances of hedge fund fraud. However, fraud is only a symptom of the basic risk issue – namely, the problem of conflicting incentives between hedge fund managers and investors.

Incentive problems arise from the delegation of authority by investors to managers over portfolio management. Managers' actions will differ from those that investors would prefer if the objectives of investors and managers differ. Differences in objectives emerge from the structure