Skin or Skim? Inside Investment and Hedge Fund Performance
77 Pages Posted: 8 Jun 2017 Last revised: 4 May 2019
Date Written: April 24, 2019
Hedge fund managers contribute substantial personal capital, or "skin in the game," into their funds. While these allocations may better align incentives, managers may also strategically allocate their private capital in ways that negatively affect investors. We find that funds with more inside investment outperform other funds within the same family. However, this relationship is driven by managerial decisions to invest capital in their least-scalable strategies and restrict the entry of new outsider capital into these funds. Our results suggest that skin in the game may work as a rent-extraction mechanism at the expense of fund participation of outside investors.
Keywords: hedge funds, ownership, managerial skill, alpha
JEL Classification: G23, G32, J33, J54
Suggested Citation: Suggested Citation