The Role of Remuneration Structures in Hedge Fund Performance
46 Pages Posted: 1 Sep 2012 Last revised: 3 Dec 2013
Date Written: August 15, 2013
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: Suggested Citation