Skin or Skim? Inside Investment and Hedge Fund Performance

77 Pages Posted: 8 Jun 2017 Last revised: 4 May 2019

See all articles by Arpit Gupta

Arpit Gupta

NYU Stern School of Business

Kunal Sachdeva

Rice University - Jesse H. Jones Graduate School of Business

Date Written: April 24, 2019

Abstract

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

Gupta, Arpit and Sachdeva, Kunal, Skin or Skim? Inside Investment and Hedge Fund Performance (April 24, 2019). 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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