Hedge fund incentive utility
= Hedge fund incentive utility
{title2=$F(y)=U(\varepsilon y+\alpha(y-w_0)_+)$}
An incentive fee above a hurdle changes a manager’s <utility function> into $F(y)=U(\varepsilon y+\alpha(y-w_0)_+)$. For <constant absolute risk aversion utility>, each branch is strictly <concave>, but the marginal reward jumps upward at the hurdle. Thus the effective terminal-wealth utility is not concave, and <concavification of incentive utility> can reveal optimal risk-taking lotteries.