Skin or Skim? Inside Investment and Hedge Fund Performance

85 Pages Posted: 8 Jun 2017 Last revised: 21 May 2018

Arpit Gupta

NYU Stern School of Business

Kunal Sachdeva

Columbia Business School

Multiple version iconThere are 2 versions of this paper

Date Written: May 21, 2018

Abstract

We document the role that inside investment plays in managerial compensation and hedge fund performance. Merging against a comprehensive and survivor bias-free dataset of US hedge funds, we find that funds with greater "skin in the game" outperform on a factor-adjusted basis. We emphasize the role of capacity constraints in explaining this result: insider funds are smaller, are less likely to accept inflows in response to positive returns, and are more likely to be closed to outside investors. These results suggest that managers earn outsize rents by operating trading strategies further from their capacity constraints when managing their own money.

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 (May 21, 2018). NYU Working Paper No. 2451/38717. Available at SSRN: https://ssrn.com/abstract=2983030

Arpit Gupta (Contact Author)

NYU Stern School of Business ( email )

New York, NY
United States

HOME PAGE: http://arpitgupta.info

Kunal Sachdeva

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

HOME PAGE: http://kunalsachdeva.com

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