Skin or Skim? Inside Investment and Hedge Fund Performance

63 Pages Posted: 8 Jun 2017 Last revised: 6 Nov 2018

See all articles by Arpit Gupta

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: November 5, 2018

Abstract

We document the role that inside investment plays in managerial compensation and hedge fund performance. Merging against a comprehensive dataset of US hedge funds, we find that funds with greater inside investment 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 (November 5, 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 )

Suite 9-160
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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