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Hedge fund seeding via fees-for-seed swaps under idiosyncratic risk

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  • Ewald, Christian-Oliver
  • Zhang, Hai

Abstract

We develop a dynamic valuation model of the hedge fund seeding business by solving the consumption and portfolio-choice problem for a risk-averse manager who launches a hedge fund through a seeding vehicle. This vehicle, i.e. fees-for-seed swap, specifies that a strategic partner (seeder) provides a critical amount of capital in exchange for participation in the funds revenue. Our results indicate that the new swap not only solves the serious problem of widespread financing constraints for new and early-stage funds (ESFs) managers, but can be highly beneficial to both the manager and the seeder if structured properly.

Suggested Citation

  • Ewald, Christian-Oliver & Zhang, Hai, 2016. "Hedge fund seeding via fees-for-seed swaps under idiosyncratic risk," Journal of Economic Dynamics and Control, Elsevier, vol. 71(C), pages 45-59.
    • Handle: RePEc:eee:dyncon:v:71:y:2016:i:c:p:45-59
    DOI: 10.1016/j.jedc.2016.07.007
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    Cited by:

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    2. Luo, Deqing & Wu, Xiaoping & Xu, Jiawen & Yan, Jingzhou, 2022. "Robust leverage decision under locked wealth and high-water mark contract," Finance Research Letters, Elsevier, vol. 46(PB).
    3. Dong, Linjia & Yang, Zhaojun, 2023. "Investment and financing analysis for a venture capital alternative," Economic Modelling, Elsevier, vol. 126(C).

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    More about this item

    Keywords

    Hedge funds; Investment; Real options;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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