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)
April 2, 2015
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 capital, leading to higher future fees. For the average hedge fund, indirect incentives are at least 1.4 times as large as direct incentives from incentive fees and managers’ personal stakes in the fund. Combining direct and indirect incentives, manager wealth increases by at least $0.39 for a $1 increase in investor wealth. Younger and more scalable hedge funds have stronger flow-performance relations, leading to stronger indirect incentives. These results have a number of implications for our understanding of incentives in the asset management industry.
Number of Pages in PDF File: 59
Keywords: Hedge Funds, Incentives, Performance, Flows
JEL Classification: G11, G23
Date posted: March 16, 2013 ; Last revised: April 3, 2015
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