A fund manager is paid performance fees with a high-water mark provision, and invests both fund's assets and  private wealth in separate but potentially correlated risky assets, aiming to maximize expected utility from private wealth in the long run. Relative risk aversion and investment opportunities are constant . We find that the fund's portfolio depends only on the fund's investment opportunities, and the private portfolio only on private opportunities.  The manager invests earned fees in the safe asset, allocating remaining private wealth in a constant-proportion portfolio, while the fund is managed as another constant-proportion portfolio , with risk aversion shifted towards one . The optimal welfare is the maximum between the optimal welfare of each investment opportunity, with no diversification gain. In particular, the manager does not hedge fund's exposure with private investments .
A fund manager invests both the fund's assets and own private wealth in separate but potentially correlated risky assets, aiming to maximize expected utility from private wealth in the long run. If relative risk aversion and investment opportunities are constant , we find that the fund's portfolio depends only on the fund's investment opportunities, and the private portfolio only on private opportunities. This conclusion is valid both for a hedge fund manager, who is paid performance fees with a high-water mark provision, and for a mutual fund manager, who is paid management fees proportional to the fund's assets. The manager invests earned fees in the safe asset, allocating remaining private wealth in a constant-proportion portfolio, while the fund is managed as another constant-proportion portfolio . The optimal welfare is the maximum between the optimal welfare of each investment opportunity, with no diversification gain. In particular, the manager does not use private investments to hedge future income from fees .
R
is paid performance fees with a high-water mark provision, and invests both
invests both the
A
own
R
Relative
If relative
R
. We
, we
A
This conclusion is valid both for a hedge fund manager, who is paid performance fees with a high-water mark provision, and for a mutual fund manager, who is paid management fees proportional to the fund's assets.
D
, with risk aversion shifted towards one
R
hedge fund's exposure with private investments
use private investments to hedge future income from fees