Study On Optimal Investment Strategies Of Hedge Funds With Incentive Fees

The optimal investment of hedge funds with incentive is one of the basic problems in research of financial engineering, received extensive attentions of the researchers at home and abroad. In recent years, the researchers have focused on the analysis of the hedge fund manager’s own stake and incentive fees for hedge fund manager’s risk taking. In reality, however, the degree of inflation also affects hedge fund manager’s investment decisions. So, we introduce inflation into the model of the investment decision of hedge fund manager. On the other hand, with the deepening of economic globalization, transnational investment has become an important part of hedge fund investment. Therefore, a hedge fund manager would have to consider the impact of fluctuations of exchange rate on his/her investment portfolio.This thesis is focus on the impact of both the inflation and the fluctuations of exchange rate on the optimal investment of a hedge fund manager. First of all, we take inflation into account in our model. Then by using the martingale methodology, we obtain the optimal investment strategy. Finally, we quantitatively analyze the impacts of the inflation, incentive fees and the manager’s own stake in the fund on the optimal investment strategy of a hedge fund manager through a numerical simulation.Secondly, in the environment of the exchange rate changes, through using the stochastic calculus method and dynamic programming method we derive the optimal investment strategy. The impacts of the fluctuations of exchange rate on the optimal investment strategy of a hedge fund manager are discussed.Finally, the numerical analysis shows that the ratio of portfolio in a risk asset of hedge fund manager will first increase rapidly with the expected moderate inflation rates, following with deteriorating of the economic environment, hedge fund manager will gradually reduce the investment on a risky asset. As the expected exchange rates increase gradually, hedge fund manager will pay more attention to macro-regulatory policies of the host country, and adjust the ratio of investment in order to gain the maximum benefit.