Charles A. Dice Center Working Paper Series No. 2013-06
62 Pages Posted: 16 Mar 2013 Last revised: 25 Feb 2016
Date Written: September 14, 2015
Indirect incentives exist in the money management industry when good current performance increases future inflows of capital, leading to higher future fees. For the average hedge fund, indirect incentives are at least 1.4 times as large as direct incentives from incentive fees and managers’ personal stakes in the fund. Combining direct and indirect incentives, manager wealth increases by at least $0.39 for a $1 increase in investor wealth. Younger and more scalable hedge funds have stronger flow-performance relations, leading to stronger indirect incentives. These results have a number of implications for ourunderstanding of incentives in the asset management industry.
Keywords: Hedge Funds, Incentives, Performance, Flows
JEL Classification: G11, G23
Suggested Citation: Suggested Citation
Lim, Jongha and Sensoy, Berk A. and Weisbach, Michael S., Indirect Incentives of Hedge Fund Managers (September 14, 2015). Journal of Finance, Forthcoming; Charles A. Dice Center Working Paper Series No. 2013-06; Fisher College of Business Working Paper No. 2013-03-06. Available at SSRN: https://ssrn.com/abstract=2233514 or http://dx.doi.org/10.2139/ssrn.2233514