Skin or Skim? Inside Investment and Hedge Fund Performance

65 Pages Posted: 12 Jun 2017 Last revised: 14 Dec 2017

Arpit Gupta

NYU Stern School of Business

Kunal Sachdeva

Rice University - Jesse H. Jones Graduate School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: December 13, 2017

Abstract

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

Gupta, Arpit and Sachdeva, Kunal, Skin or Skim? Inside Investment and Hedge Fund Performance (December 13, 2017). Columbia Business School Research Paper No. 17-61. Available at SSRN: https://ssrn.com/abstract=2982889 or http://dx.doi.org/10.2139/ssrn.2982889

Arpit Gupta (Contact Author)

NYU Stern School of Business ( email )

New York, NY
United States

HOME PAGE: http://arpitgupta.info

Kunal Sachdeva

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

HOME PAGE: http://kunalsachdeva.com

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