Indirect Incentives of Hedge Fund Managers
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
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, G23working papers series
Date posted: March 16, 2013 ; Last revised: August 4, 2014
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