Hedge fund seeding via fees-for-seed swap sunder idiosyncratic risk

Christian-Oliver Ewald, Hai Zhang

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

We develop a dynamic valuation model of the hedge fund seeding business by solving the consumption and portfolio-choice problem for a risk-averse manager who launches a hedge fund through a seeding vehicle. This vehicle, i.e. fees-for-seed swap, specifies that a strategic partner (seeder) provides a critical amount of capital in exchange for participation in the funds revenue. Our results indicate that the new swap not only solves the serious problem of widespread financing constraints for new and early-stage funds (ESFs) managers, but can be highly beneficial to both the manager and the seeder if structured properly.
LanguageEnglish
Pages45-59
Number of pages15
JournalJournal of Economic Dynamics and Control
Volume71
Early online date5 Aug 2016
DOIs
Publication statusPublished - 31 Oct 2016

Fingerprint

Swap
Seed
Managers
Portfolio Choice
Valuation
Fees
Swaps
Hedge funds
Idiosyncratic risk
Industry
Model
Participation
Business
Revenue
Portfolio choice
Risk-averse
Valuation model
Financing constraints
Fund managers

Keywords

  • hedge funds
  • investment
  • real options
  • risk-averse
  • portfolio-choice
  • consumption
  • dynamic valuation model
  • seeding vehicle
  • early-stage funds managers

Cite this

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Hedge fund seeding via fees-for-seed swap sunder idiosyncratic risk. / Ewald, Christian-Oliver; Zhang, Hai.

In: Journal of Economic Dynamics and Control, Vol. 71, 31.10.2016, p. 45-59.

Research output: Contribution to journalArticle

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AB - We develop a dynamic valuation model of the hedge fund seeding business by solving the consumption and portfolio-choice problem for a risk-averse manager who launches a hedge fund through a seeding vehicle. This vehicle, i.e. fees-for-seed swap, specifies that a strategic partner (seeder) provides a critical amount of capital in exchange for participation in the funds revenue. Our results indicate that the new swap not only solves the serious problem of widespread financing constraints for new and early-stage funds (ESFs) managers, but can be highly beneficial to both the manager and the seeder if structured properly.

KW - hedge funds

KW - investment

KW - real options

KW - risk-averse

KW - portfolio-choice

KW - consumption

KW - dynamic valuation model

KW - seeding vehicle

KW - early-stage funds managers

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