Private Hedge Fund Firms’ Incentives and Performance: Evidence from Audited Filings

The European Journal of Finance

36 Pages Posted: 8 Jul 2021

See all articles by Mark C. Hutchinson

Mark C. Hutchinson

University College Cork

Quang Minh Nhi Nguyen

The University of Danang - University of Economics - the University of Danang

Mark B. Mulcahy

University College Cork - College of Business and Law

Date Written: March 25, 2021

Abstract

Using an entirely new dataset of audited filings from firms that manage hedge funds, this study examines whether the hedge fund compensation contract aligns managerial incentives and investor interests. Our novel dataset allows us to distinguish between firms focused exclusively on hedge fund management and diversified firms offering products in addition to hedge funds. Our results for compensation data of hedge fund only management firms confirm that compensation increases as assets under management increase, despite increased costs and performance diseconomies of scale. Hedge funds managed by diversified firms have significantly lower performance. A relatively small proportion of the compensation from these firms is generated from hedge funds. The results are consistent with diversified hedge fund firms having weaker alignment between managerial incentives and investment performance.

Suggested Citation

Hutchinson, Mark C. and Nguyen, Quang Minh Nhi and Mulcahy, Mark B., Private Hedge Fund Firms’ Incentives and Performance: Evidence from Audited Filings (March 25, 2021). The European Journal of Finance, Available at SSRN: https://ssrn.com/abstract=3881153

Mark C. Hutchinson

University College Cork ( email )

O'Rahilly Building
College Road
Cork
Ireland

Quang Minh Nhi Nguyen (Contact Author)

The University of Danang - University of Economics - the University of Danang ( email )

71 Ngu Hanh Son Street
Danang
Vietnam

Mark B. Mulcahy

University College Cork - College of Business and Law ( email )

ORB 3.09
Western Road
Cork
Ireland

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