Hedge-fund management with liquidity constraint

We propose a model for a manager of a hedge fund with a liquidity constraint, where he is seeking to optimize his utility of wealth, with one and multiple period horizons. By using stochastic control techniques, we state the corresponding multi-dimensional Hamilton-Jacobi-Bellman partial differential equation and we use a robust numerical approximation to obtain its unique viscosity solution. We examine the effects of the liquidity constraint on managerial trading decisions and optimal allocation, finding that the manager behaves in a less risky manner. We also calculate the cost of being at sub-optimal positions as the difference in the certainty equivalent payoff for the manager. Moreover, we compare the values of a benchmark hedge fund with another one having a risky asset with a higher rate of return but less liquidity, finding that higher rate of return with a liquidity constraint does not always lead to greater return. © 2019 World Scientific Publishing Company.

• Fecha de publicación: 2019
• Institución: Universidad del Rosario
• Repositorio: Repositorio EdocUR - U. Rosario
• Idioma: eng
• OAI Identifier: oai:repository.urosario.edu.co:10336/22155
• Acceso en línea: https://doi.org/10.1142/S0219024919500262; https://repository.urosario.edu.co/handle/10336/22155
• Palabra clave: Finite differences; Hedge-fund management; Liquidity; Semi-lagrangian; Stochastic control
• License: Abierto (Texto Completo)