Over time, the somewhat arbitrary selection of the calendar year as a performance fee window has raised the hackles of some hedge fund investors.  Some argue that a year is too short a time and performance fees should be calculated – or at least paid out – only after several years.

While a longer performance fee calculation period seems to make perfect sense (it would reduce the “asymmetry” where the manager who can win but can’t lose), a new research study reveals one potential drawback of such a system.

In “Locking in the profits or putting it all on black?” Andrew Clare and Nick Motson of the Cass Business School examine whether hedge fund managers reduce risk at the end of a year when they are likely to receive a performance fee and whether managers “put it all on black” toward the end of years when they are not yet in performance fee territory.

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