Is Pay for Performance Effective? Evidence from the Hedge Fund Industry

44 Pages Posted: 26 Jan 2009 Last revised: 7 Mar 2011

See all articles by Bing Liang

Bing Liang

University of Massachusetts Amherst - Department of Finance

Christopher Schwarz

University of California at Irvine

Date Written: March 1, 2011

Abstract

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

Liang, Bing and Schwarz, Christopher, Is Pay for Performance Effective? Evidence from the Hedge Fund Industry (March 1, 2011). Available at SSRN: https://ssrn.com/abstract=1333230 or http://dx.doi.org/10.2139/ssrn.1333230

Bing Liang

University of Massachusetts Amherst - Department of Finance ( email )

Amherst, MA 01003
United States

Christopher Schwarz (Contact Author)

University of California at Irvine ( email )

Irvine, CA 92697-3125
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
340
Abstract Views
3,770
rank
86,688
PlumX Metrics