Skin or Skim? Inside Investment and Hedge Fund Performance
65 Pages Posted: 12 Jun 2017 Last revised: 14 Dec 2017
Date Written: December 13, 2017
Using a comprehensive and survivor-bias free dataset of U.S. hedge funds, we document the role that inside investment plays in managerial compensation and fund performance. We find that funds with greater investment by insiders outperform funds with less “skin in the game” on a factor-adjusted basis; exhibit greater return persistence; and feature lower fund flow-performance sensitivities. These results suggest that managers earn outsize rents by operating trading strategies further from their capacity constraints when managing their own money. Our findings have implications for optimal portfolio allocations of institutional investors and models of delegated asset management.
Keywords: Hedge Funds, Ownership, Managerial Skill, Alpha, Compensation
JEL Classification: G23, G32, J33, J54
Suggested Citation: Suggested Citation