Skin or Skim? Inside Investment and Hedge Fund Performance
85 Pages Posted: 8 Jun 2017 Last revised: 21 May 2018
Date Written: May 21, 2018
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: Suggested Citation