Robust risk choice under high-water mark contract

By assuming that a risk-neutral hedge fund manager has ambiguous beliefs about the return process of risky asset, we study his robust risk choice under high-water mark. The results show without management fees, ambiguity aversion induces to take more as is close termination but less approaches With increases induced and moderates manager’s incentive risk, predicting it with higher rates fees reduces asset holdings when he becomes confident and/or pessimistic future returns. model implies managers’ possible factor explaining activities in stock markets during financial crisis 2007–2009 US Treasury COVID-19 crisis. Finally, taxation taken into account.