{"id":13,"date":"2008-04-25T23:00:18","date_gmt":"2008-04-26T03:00:18","guid":{"rendered":"http:\/\/blogs.law.harvard.edu\/hedgefund\/2008\/04\/25\/hedge-fund-investor-is-a-prince-hed"},"modified":"2008-04-25T23:14:41","modified_gmt":"2008-04-26T03:14:41","slug":"hedge-fund-investor-is-a-prince-hedge-fund-manager-is-a-governor","status":"publish","type":"post","link":"https:\/\/archive.blogs.harvard.edu\/hedgefund\/2008\/04\/25\/hedge-fund-investor-is-a-prince-hedge-fund-manager-is-a-governor\/","title":{"rendered":"Hedge Fund Investor Is A Prince; Hedge Fund Manager Is A Governor."},"content":{"rendered":"

Hedge Fund Investor Is A Prince; Hedge Fund Manager Is A Governor. <\/span><\/p>\n

—-Newest Model for Hedge fund regulation from <\/span>Roger B. Myerson.* <\/span><\/p>\n

[My conversation with him occurred on April 24, 2008, Cambridge MA.]<\/span><\/p>\n

<\/span><\/p>\n

As Roger says, he \u201cconsider[s] a model of governors serving a sovereign prince, who wants to deter them from corruption and rebellion.\u201d In hedge fund world, I consider a model of hedge fund managers managing their investors\u2019 money, who want to deter them from fraud and excessive risk. <\/span><\/p>\n

<\/span><\/p>\n

In Roger\u2019s article, \u201cgovernors must be penalized when they cause observable crises, but a governor\u2019s expected benefits must never go below the rebellion payoff, which itself is better than what any candidate could pay for the office.\u201d In hedge fund industry, I think hedge fund managers have to be penalized when they cause obvious crises, but a hedge fund manager\u2019s expected benefits must never go below the performance fee, which itself is much higher than the performance fee they could get from fraud. <\/span><\/p>\n

<\/span><\/p>\n

According to Roger, \u201cgovernors can trust the prince’s promises only up to a given credit bound.\u201d In hedge fund world, I guess hedge fund managers can have faith in the investors\u2019 loyalty only up to a given credit bound as well. <\/span><\/p>\n

<\/span><\/p>\n

This paper goes on and on, and the content of the paper provides an alternative approach to regulate or self-regulate the hedge fund industry. He mainly use \u201can extension of the Becker-Stigler and Sharpiro-Stiglitz dynamic agency models\u201d to address the issues with regard to \u201cjudging and punishing high officials of the state,\u201d, which can be used to hedge fund managers as well.<\/span><\/p>\n

 <\/p>\n

As Roger Myerson writes, “For high officials to be deterred from abusing their power, they must be confident that loyal service will bring great expected rewards.” In hedge fund industry, I argue that in order to prevent hedge fund managers from defrauding investors, fund managers have to be confident that their honest disclosure will be greatly compensated.<\/p>\n

Even though he did not mention hedge fund, this is a good model to consider in hedge fund industry.<\/p>\n

<\/span><\/p>\n

*Roger B. Myerson, the 2007 Nobel Laureate in Economics. \u201cLeadership, Trust, And Power: Dynamic Moral Hazard In High Office,\u201d April 2008. <<\/span>home.uchicago.edu\/~rmyerson\/research\/power.pdf<\/span>><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Hedge Fund Investor Is A Prince; Hedge Fund Manager Is A Governor. —-Newest Model for Hedge fund regulation from Roger B. Myerson.* [My conversation with him occurred on April 24, 2008, Cambridge MA.] As Roger says, he \u201cconsider[s] a model of governors serving a sovereign prince, who wants to deter them from corruption and rebellion.\u201d […]<\/p>\n","protected":false},"author":1784,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1,2560,2559],"tags":[],"class_list":["post-13","post","type-post","status-publish","format-standard","hentry","category-uncategorized","category-no-regulation","category-yes-regulation"],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/archive.blogs.harvard.edu\/hedgefund\/wp-json\/wp\/v2\/posts\/13","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/archive.blogs.harvard.edu\/hedgefund\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/archive.blogs.harvard.edu\/hedgefund\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/archive.blogs.harvard.edu\/hedgefund\/wp-json\/wp\/v2\/users\/1784"}],"replies":[{"embeddable":true,"href":"https:\/\/archive.blogs.harvard.edu\/hedgefund\/wp-json\/wp\/v2\/comments?post=13"}],"version-history":[{"count":0,"href":"https:\/\/archive.blogs.harvard.edu\/hedgefund\/wp-json\/wp\/v2\/posts\/13\/revisions"}],"wp:attachment":[{"href":"https:\/\/archive.blogs.harvard.edu\/hedgefund\/wp-json\/wp\/v2\/media?parent=13"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/archive.blogs.harvard.edu\/hedgefund\/wp-json\/wp\/v2\/categories?post=13"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/archive.blogs.harvard.edu\/hedgefund\/wp-json\/wp\/v2\/tags?post=13"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}