Skin in the Game versus Skimming the Game: Governance, Share Restrictions, and Insider Flows
51 Pages Posted: 15 Mar 2011 Last revised: 3 Feb 2014
Date Written: February 2, 2014
Share restrictions in the hedge-fund industry are often introduced as means of protecting the common interest of investors. Yet, this paper advances that such restrictions induce information asymmetry between managers and their clients about future fund flows. Fund flows, in turn, predict future fund returns for share-restricted funds, especially among funds with low levels of governance and funds managing insiders' wealth, providing managers incentive to trade in advance of their clients. Some direct evidence for such managerial action are presented, as well as additional consistent evidence from the flows of funds within the same family. The evidence suggest that private information about a fund, not only about the fundamental value of its assets, may constitute material information. Such private information engenders potential conflict of interest between fund managers and investors, with implications for proper fund governance and disclosure policy concerning managerial actions.
Keywords: Hedge funds; Governance; Fund flows; Inside information; Asset pricing
JEL Classification: G12, G14, G23, G34
Suggested Citation: Suggested Citation