Indirect Incentives of Hedge Fund Managers

62 Pages Posted: 16 Mar 2013 Last revised: 25 Feb 2016

Jongha Lim

California State University - Fullerton

Berk A. Sensoy

Ohio State University - Fisher College of Business

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 14, 2015

Abstract

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

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

Jongha Lim

California State University - Fullerton ( email )

SGMH 5170
Fullerton, CA 92831
United States
657-278-7987 (Phone)

Berk A. Sensoy

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Michael S. Weisbach (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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