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Determinants of Hedge Fund Internal Controls and Fees

Chicago Booth Research Paper No. 09-44

Chicago Booth Initiative on Global Markets Working Paper No. 46

61 Pages Posted: 18 Sep 2008 Last revised: 16 Nov 2011

Gavin Cassar

INSEAD

Joseph J. Gerakos

Tuck School of Business at Dartmouth College

Multiple version iconThere are 2 versions of this paper

Date Written: June 2009

Abstract

We investigate the determinants of hedge fund internal controls and their association with the fees that funds charge investors. Hedge funds are subject to minimal regulation. Hence, hedge fund managers voluntarily implement internal controls, and managers and investors freely contract on fees. We find that internal controls are stronger in funds with higher potential agency costs. Further, internal controls are stronger in funds domiciled in jurisdictions that provide investors with limited legal redress for fraud and financial misstatements. Short selling funds, however, are more likely to protect information of their investment positions by implementing weaker internal controls that limit external oversight. With respect to fees, we find that the percentage of positive profits that the manager receives increases in the strength of the fund’s internal controls. Finally, removing the manager from setting and reporting the fund’s official net asset value, along with reputational incentives and monitoring by leverage providers, are all associated with lower likelihoods of future regulatory investigations of fraud and/or financial misstatement.

Keywords: hedge funds, internal controls, investor fees, restatements

JEL Classification: D82, J33, G20, G34, M41, M49

Suggested Citation

Cassar, Gavin and Gerakos, Joseph J., Determinants of Hedge Fund Internal Controls and Fees (June 2009). Chicago Booth Initiative on Global Markets Working Paper No. 46. Available at SSRN: https://ssrn.com/abstract=1268456 or http://dx.doi.org/10.2139/ssrn.1268456

Gavin Cassar (Contact Author)

INSEAD ( email )

Boulevard de Constance
Fontainebleau, 77305
France

HOME PAGE: http://https://www.insead.edu/faculty-research/faculty/gavin-cassar

Joseph J. Gerakos

Tuck School of Business at Dartmouth College ( email )

Hanover, NH 03755
United States

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