The Dynamics of Hedge Fund Fees

42 Pages Posted: 17 Aug 2010 Last revised: 14 Nov 2013

Prachi Deuskar

Indian School of Business

Zhi Jay Wang

University of Oregon - Charles H. Lundquist School of Business

Youchang Wu

University of Oregon - Lundquist College of Business

Quoc H. Nguyen

University of Illinois at Urbana-Champaign

Date Written: March 15, 2103

Abstract

In contrast to the perception of a common 2/20 fee structure, we find considerable cross-sectional and time series variations in hedge fund fees using a large panel data set. Fund family characteristics and prior performance play an important role in fee determination. New fund families are likely to charge at- or above-median fees. Initial fees of funds introduced by an existing family are positively related to the prior performance of the family as well as of the investment strategy they follow. Furthermore, management fees are dynamically adjusted in response to past fund performance. Funds that increase management fee more aggressively experience a bigger drop in subsequent money inflows, and are more likely to maintain their good performance. This suggests that fee increases, which typically apply only to new investors, may benefit existing investors by mitigating diseconomies of scale.

Keywords: Hedge Funds, Fees, Incentives

JEL Classification: G23, G29

Suggested Citation

Deuskar, Prachi and Wang, Zhi Jay and Wu, Youchang and Nguyen, Quoc H., The Dynamics of Hedge Fund Fees (March 15, 2103). Available at SSRN: https://ssrn.com/abstract=1659275 or http://dx.doi.org/10.2139/ssrn.1659275

Prachi Deuskar

Indian School of Business ( email )

Hyderabad, Gachibowli 500 019
India

Zhi Jay Wang (Contact Author)

University of Oregon - Charles H. Lundquist School of Business ( email )

1208 University of Oregon
Eugene, OR 97403-1208
United States

Youchang Wu

University of Oregon - Lundquist College of Business ( email )

1280 University of Oregon
Eugene, OR 97403
United States

Quoc H. Nguyen

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

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