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The Who and How of Hedge Fund Risk Shifting

Authors: Spencer Andrews and Salil Gadgil

A new OFR Working Paper by Spencer Andrews and Salil Gadgil studies whether performance-based compensation incentives affect the risk choices of hedge fund managers. Using supervisory data, the authors find that both a fund’s relative and absolute performance influence future risk-taking behavior. The analysis uses the regulatory filings to examine how various fund characteristics, including redemption policies and ownership structures, affect the intensity with which managers respond to underperformance and the channels through which they amplify portfolio volatility.