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We analyze the asset manager’s portfolio problem when he is remunerated through a High Water Mark incentive fee and a management fee, and the assets under management are characterized by in/outflow of funds as a function of the performance of the fund with respect to a benchmark. Once we solve numerically the investment problem, we show that the presence of a flow fund induces risk in excess in case of a High Water Mark defined on the pure performance of the fund. Instead a High Water Mark defined on the assets under management leads to a more prudent investment strategy.
Journal: Operations Research Letters - Volume 44, Issue 5, September 2016, Pages 607–611