Valuing Hedge Fund Fees

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Date

2006

Authors

Xiao, Li

Advisor

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Publisher

University of Waterloo

Abstract

This thesis applies a Partial Integral Differential Equation model, along with a Monte Carlo approach to quantitatively analyze the no arbitrage value of hedge fund performance fees. From a no-arbitrage point of view, the investor in a hedge fund is providing a free option to the manager of the hedge fund. The no-arbitrage value of this option can be locked in by the hedge fund manager using a simple hedging strategy. Interpolation methods, grid construction techniques and parallel computation techniques are discussed to improve the performance of the numerical methods for valuing this option.

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Keywords

Computer Science, Hedge fund, performance fee, parallel computation, PIDE

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