Venture Capital and Hedge Funds loss aversion and risk taking

What is it about?

Mutual funds compete,in tournaments,based on,rank. Investors allocate new money,only into top ones and ignore the rest. Losing managers play go-for-broke in order ,to place high in the contest. In contrast, venture capital firms and hedge funds compete based on risk-adjusted performance. Investors’ behavioral biases matter more. In particular, investors’ loss aversion influences a fee-maximizing manager. It causes a losing manager to scale down risk and a winning one take some. It provides a risk-mitigating safety valve which is absent in the performance-obscuring tournament.

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Why is it important?

The loss aversion of VC and Hedge Fund managers act as a risk mitigating mechanism in tournaments setting.