Brown, Goetzmann, and Park (2001) report a negative relation between changes in hedge fund risk and mid-year relative fund performance. We find that such "tournament" behavior is more prevalent in the (backfilled) period when funds may be at an incubation stage, before they start voluntarily reporting to a database. Excluding backfilled data, we find that variance shifts depend on absolute rather than relative fund performance. Specifically, hedge funds are more likely to increase risk if they

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... re below their high-water mark at mid-year. However, the propensity for losing funds to increase risk is significantly weaker among the funds that tie the manager's performance pay to the fund's high-water mark -suggesting a possible benefit from such incentive structures -and among funds that face little immediate risk of being closed. Overall, the combination of factors such as reporting performance to a database, high-water mark provisions, and low risk of fund closure appear to make poorly performing funds more conservative with regard to risk shifting. Abstract Brown, Goetzmann, and Park (2001) report a negative relation between changes in hedge fund risk and mid-year relative fund performance. We find that such "tournament" behavior is more prevalent in the (backfilled) period when funds may be at an incubation stage, before they start voluntarily reporting to a database. Excluding backfilled data, we find that variance shifts depend on absolute rather than relative fund performance. Specifically, hedge funds are more likely to increase risk if they are below their high-water mark at mid-year. However, the propensity for losing funds to increase risk is significantly weaker among the funds that tie the manager's performance pay to the fund's high-water mark -suggesting a possible benefit from such incentive structures -and among funds that face little immediate risk of being closed. Overall, the combination of factors such as reporting performance to a database, high-water mark provisions, and low risk of fund closure appear to make poorly performing funds more conservative with regard to risk shifting.