Gifts from Employer

Last year’s Schweser sample exam had the following question, which I got wrong. XXX buyside company instituted an incentive program for its PMs. The firm will award an all-expense-paid vacation to the Cayman islands for any PM who generates two consecutive quarterly returns for his clients in excess of 10%. I said that it violated Standards and Code. But the answer says that it didn’t. Are all gifts from your employer considered O.K.? Clearly there is something wrong with this incentive program. Yet, Schweser says it’s OK. What do you think?

Your employer can pay you a bonus

Yes but how I go about generating that performance is the problem. I can’t simply generate this without increasing the risk of the portfolio. There in lies my problem. How can a firm set such ridiculous compensation scheme to every PM including, say, the guys who manage portfolios that are supposed to contain all fixed income??? What? add some sub prime CDOs? Your thoughts???

Everyone in the hedge fund business gets paid 20% incentive regardless of risk. There is just not an ethical principle that says that incentives that create moral hazard are unethical.

My 2 cents: I believe your duty as a fund manager is to disclose to the client the level of risk that the client will be exposed to. The question you cited does not provide enough information for you to assume that you are now in violation of that disclosure nor that your investment style has now changed to be overtly risky (in relation to what the client is expecting). It’s not unethical for your employer to pay you a bonus or payment-in-kind for exceptional performance.

everyone already posted has it right. not unethical to provide performance incentives. you as a PM have a duty to adhear to the IPS etc. but you can accept anything your employer wants to give you.

And most of the time you have no choice but to accept everything your employer wants to give you…

JoeyDVivre Wrote: ------------------------------------------------------- > And most of the time you have no choice but to > accept everything your employer wants to give > you… HA HA HA… too true, Joey!!!

I guess I was over-thinking this a bit. Thanks for all your replies.