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OPTIMAL INVESTMENT IN HEDGE FUNDS UNDER LOSS AVERSION
https://doi.org/10.1142/S0219024917500145Cited by:6 (Source: Crossref)
Abstract
We study optimal investment problems in hedge funds for a loss averse manager under the framework of cumulative prospect theory. We obtain explicit solutions for a general utility function satisfying the Inada conditions and a piece-wise exponential utility function. Through a sensitivity analysis, we find that the manager reduces the risk of the hedge fund when her/his loss aversion, risk aversion, ownership in the fund, or management fee ratio increases. However, the increase of incentive fee ratio drives the manager to seek more risk in order to achieve higher prospect utility.
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