Determinants of Hedge Fund Internal Controls and Fees

Posted: 19 Jul 2010

See all articles by Gavin Cassar

Gavin Cassar

INSEAD

Joseph Gerakos

Tuck School of Business at Dartmouth College

Multiple version iconThere are 2 versions of this paper

Date Written: July 19, 2010

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. 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 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, Determinants of Hedge Fund Internal Controls and Fees (July 19, 2010). Accounting Review, Vol. 85, No. 6, 2010, Available at SSRN: https://ssrn.com/abstract=1645394

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 Gerakos

Tuck School of Business at Dartmouth College ( email )

Hanover, NH 03755
United States

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