The Role of Remuneration Structures in Hedge Fund Performance

46 Pages Posted: 1 Sep 2012 Last revised: 3 Dec 2013

See all articles by Ivan Guidotti

Ivan Guidotti

University of Neuchatel - Institute of Financial Analysis

Istvan Nagy

University of Neuchatel - Institute of Financial Analysis

Date Written: August 15, 2013

Abstract

In this paper, we rationalize the persistent abnormal performance of hedge funds. We show how the commitment to deliver an absolute return, the decreasing returns to scale to which hedge fund strategies are subject, and the performance-linked compensation combine with the incomeaximizing behavior of managers to effectively align the interests of investors and managers. Thanks to the coexistence of these elements, managers have an incentive to control the size of the funds. Therefore, performance-diluting flows do not occur and abnormal performance persists. The model can quantitatively reproduce many empirical facts about hedge funds.

Keywords: Hedge Fund, Fees, Incentives, Remuneration, Persistence, Performance, Regulation

JEL Classification: G23, G29

Suggested Citation

Guidotti, Ivan and Nagy, Istvan, The Role of Remuneration Structures in Hedge Fund Performance (August 15, 2013). Midwest Finance Association 2013 Annual Meeting Paper, Available at SSRN: https://ssrn.com/abstract=2138860 or http://dx.doi.org/10.2139/ssrn.2138860

Ivan Guidotti (Contact Author)

University of Neuchatel - Institute of Financial Analysis ( email )

Pierre-a-Mazel,7
Neuchatel, CH-2000
Switzerland

Istvan Nagy

University of Neuchatel - Institute of Financial Analysis ( email )

Pierre-a-Mazel,7
Neuchatel, CH-2000
Switzerland
+41327181372 (Phone)

HOME PAGE: http://members.unine.ch/istvan.nagy/index.html

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