Hedge fund seeding with fees-for-guarantee swaps

Yun Feng, Binghua Huang, Hai Zhang

Research output: Contribution to journalArticle

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Abstract

This paper introduces a new instrument in the context of hedge fund seeding, which we call fees-for-guarantee swap, with the aim of alleviating the early-stage funds (ESF)managers’financial constraint caused by severe asymmetric information between investors and managers. The swap plays a role in enhancing the ESFs manager’s credibility by swapping part of her fees for an insurance on the behalf of seeding investors, whom would be fully refunded once the fund defaults. We set up a dynamic continuous-time framework within which closed-form prices for seed capital, guarantee costs and other claims have been derived. Our numerical findings indicate that incentive compensations, managerial ownership and hedge funds liquidation risks not only inhibit ESFs managers’ risk-shifting incentive but align interests among ESFs manager, seeder and insurer as well.
Original languageEnglish
Pages (from-to)16-34
Number of pages19
JournalEuropean Journal of Finance
Volume25
Issue number1
Early online date3 Apr 2018
DOIs
Publication statusPublished - 2 Jan 2019

Fingerprint

Swaps
Managers
Guarantee
Fees
Hedge funds
Investors
Costs
Liquidation
Managerial ownership
Incentive compensation
Continuous time
Asymmetric information
Credibility
Incentives
Insurance
Insurer
Risk-shifting

Keywords

  • hedge fund seeding
  • fees for seed swap
  • fees for guarantee swap
  • risk shifting

Cite this

Feng, Yun ; Huang, Binghua ; Zhang, Hai. / Hedge fund seeding with fees-for-guarantee swaps. In: European Journal of Finance. 2019 ; Vol. 25, No. 1. pp. 16-34.
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Hedge fund seeding with fees-for-guarantee swaps. / Feng, Yun; Huang, Binghua; Zhang, Hai.

In: European Journal of Finance, Vol. 25, No. 1, 02.01.2019, p. 16-34.

Research output: Contribution to journalArticle

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