The Performance of Hedge Fund Performance Fees

Fisher College of Business Working Paper No. 2020-03-014

Charles A. Dice Working Paper No. 2020-14

63 Pages Posted: 19 Jun 2020 Last revised: 2 Jul 2020

See all articles by Itzhak Ben-David

Itzhak Ben-David

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

Justin Birru

Ohio State University (OSU) - Department of Finance

Andrea Rossi

University of Arizona - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: June 24, 2020

Abstract

We study the long-run outcomes associated with hedge funds' compensation structure. Over a 22-year period, the aggregate effective incentive fee rate is 2.5 times the average contractual rate (i.e., around 50% instead of 20%). Overall, investors collected 36 cents for every dollar earned on their invested capital (over a risk-free hurdle rate and before adjusting for any risk). In the cross-section of funds, there is a substantial disconnect between lifetime performance and incentive fees earned. These poor outcomes stem from the asymmetry of the performance contract, investors' return-chasing behavior, and underwater fund closures.

Keywords: Hedge Funds, Performance, Asset Management, Incentive Fees

JEL Classification: G11, G23

Suggested Citation

Ben-David, Itzhak and Birru, Justin and Rossi, Andrea, The Performance of Hedge Fund Performance Fees (June 24, 2020). Fisher College of Business Working Paper No. 2020-03-014, Charles A. Dice Working Paper No. 2020-14, Available at SSRN: https://ssrn.com/abstract=3630723 or http://dx.doi.org/10.2139/ssrn.3630723

Itzhak Ben-David (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

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HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/

Justin Birru

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Andrea Rossi

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

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