Skin or Skim? Inside Investment and Hedge Fund Performance

51 Pages Posted: 2 Aug 2019 Last revised: 12 Jul 2021

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: July 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.

Suggested Citation

Gupta, Arpit and Sachdeva, Kunal, Skin or Skim? Inside Investment and Hedge Fund Performance (July 2019). NBER Working Paper No. w26113, Available at SSRN: https://ssrn.com/abstract=3428165

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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