Is Pay for Performance Effective? Evidence from the Hedge Fund Industry
44 Pages Posted: 26 Jan 2009 Last revised: 7 Mar 2011
Date Written: March 1, 2011
Using voluntary decisions to limit investment, we investigate if the high pay–performance sensitivities of hedge fund managers cause them to avoid overinvestment. Our results show that the primary objective of hedge fund managers is to hoard assets. We find that for funds closed to new investors, performance shifts from outperformance in the pre-closing period to average performance in the post-closing period. Funds that reopen are still too large to regain their outperformance. We also find that funds with higher outflow restrictions are less likely to close and experience a significantly higher performance loss over time. These results suggest that the high pay–performance deltas are not strong enough to prevent overinvestment and are offset by investor outflow restrictions.
Keywords: Hedge funds, closed to investment, compensation
JEL Classification: G1, G2
Suggested Citation: Suggested Citation