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January 22, 2009

Comments

Phil

While I understand the comment, I wonder whether having compensation paid out of realized profits really works for typical hedge funds. If you take the typical hedge fund trading in highly liquid securities, requiring compensation to be paid out of realized profits would seem to be a recipe for incenting portfolio managers to trade out and then back into their positions frequently, so as to trigger realized profits. All that does is generate commission revenue for the brokers covering them - good for sell side firms, but not for fund investors. Isn't the problem really only limited to the assets in illiquid markets, where the realized vs. unrealized distinction is more material?

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