Hedge and mutual funds' fees and the separation of private investments (Q2516773)

The paper discusses the problem of the interplay between manager's personal and professional investments. It is focused on a model with two investment opportunities, one accessible to the fund, the other accessible to the manager's private account. Investment opportunities are constant over time and potentially correlated. The authors consider a fund manager with a constant relative risk aversion and a long horizon, who maximizes expected utility from private wealth. The manager's optimal investment policies for both hedge and mutual fund managers are found explicitly. The optimal portfolio for the fund entails a constant risky proportion which corresponds to the manager's own risk aversion for mutual funds. The optimal policy for private wealth is more complex but it is described as well. In summary, it is estabished that neither performance fees nor management fees create the incentive to use private investments to either hedge or augment the fund's returns. The results of the paper rely on the maximization of the equivalent safe rate for constant relative risk aversion and a long horizon.