Abstract
Analyzing a sample of hedge funds that report daily returns to Bloomberg, we document a high nonlinearity and a strong seasonal pattern in managerial risk taking. During earlier months of a year, poorly performing funds reduce their risk. The risk reduction is stronger for funds with higher management fees, shorter notice periods prior to redemption, and recently deteriorating performance, which is consistent with a managerial aversion to early fund liquidation and to the loss of future management fees. Towards the end of a year, on the contrary, poorly performing funds gamble for resurrection by increasing risk. The risk increase is not purely driven by high-water mark provisions and incentive fees, which points towards the existence of other incentives, like reporting good performance at year end.
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