Abstract

http://ssrn.com/abstract=2233514
 
 

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Indirect Incentives of Hedge Fund Managers


Jongha Lim


California State University - Fullerton

Berk A. Sensoy


Ohio State University - Fisher College of Business

Michael S. Weisbach


Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

July 31, 2014

Charles A. Dice Center Working Paper Series No. 2013-06
Fisher College of Business Working Paper No. 2013-03-06

Abstract:     
Indirect incentives exist in the money management industry when good current performance increases future inflows of new capital, leading to higher future fees. We quantify the magnitude of indirect performance incentives for hedge fund managers. Flows respond quickly and strongly to performance; lagged performance has a monotonically decreasing impact on flows as lags increase up to two years. Indirect incentives for the average fund are at least 1.6 times as large as direct incentives from incentive fees and managers’ personal stakes in the fund. For new funds, indirect incentives are seven to fourteen times as large as direct incentives. Combining direct and indirect incentives, for each dollar generated for their investors in a given year, manager wealth increases by at least forty-one cents. The performance of older and capacity constrained funds has a considerably weaker impact on future flows, leading to weaker indirect incentives.

Number of Pages in PDF File: 58

Keywords: Hedge Funds, Incentives, Performance, Flows

JEL Classification: G11, G23

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Date posted: March 16, 2013 ; Last revised: August 4, 2014

Suggested Citation

Lim, Jongha and Sensoy, Berk A. and Weisbach, Michael S., Indirect Incentives of Hedge Fund Managers (July 31, 2014). Charles A. Dice Center Working Paper Series No. 2013-06; Fisher College of Business Working Paper No. 2013-03-06. Available at SSRN: http://ssrn.com/abstract=2233514 or http://dx.doi.org/10.2139/ssrn.2233514

Contact Information

Jongha Lim
California State University - Fullerton ( email )
SGMH 5170
Fullerton, CA 92831
United States
657-278-7987 (Phone)
Berk A. Sensoy
Ohio State University - Fisher College of Business ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States

Michael S. Weisbach (Contact Author)
Ohio State University (OSU) - Department of Finance ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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