Abstract

http://ssrn.com/abstract=2461100
 


 



Do Incentive Fees Signal Skill? Evidence from the Hedge Fund
Industry


Paul Lajbcygier


Department of Banking & Finance, Monash University

Joe Rich


Monash University - Department of Accounting and Finance

July 1, 2014


Abstract:     
We examine whether fee structure acts as a reliable signal of hedge fund performance. Recent theoretical work suggests that, given the unique information asymmetries faced by hedge fund investors, managers will use performance-based incentive fees to signal skill. We test this hypothesis empirically and find little support for the notion that high incentive fee funds generate superior risk-adjusted returns during normal market conditions; rather, increases in incentive fee level are accompanied by an increased proclivity to take on risk and increased leverage. Consequently, higher incentive fee funds suffer higher rates of attrition. Higher incentive fee funds do demonstrate lower market correlations and thus provide enhanced diversification benefits. As a result, high fee funds exhibited remarkable out-performance during the recent global financial crisis.

Number of Pages in PDF File: 41

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Date posted: July 1, 2014  

Suggested Citation

Lajbcygier, Paul and Rich, Joe, Do Incentive Fees Signal Skill? Evidence from the Hedge Fund Industry (July 1, 2014). Available at SSRN: http://ssrn.com/abstract=2461100 or http://dx.doi.org/10.2139/ssrn.2461100

Contact Information

Paul Lajbcygier (Contact Author)
Department of Banking & Finance, Monash University ( email )
Wellington Road
Victoria, 3145
Australia
Joe Rich
Monash University - Department of Accounting and Finance ( email )
Building 11E
Clayton, Victoria 3800
Australia
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