Flows, Performance, and Managerial Incentives in Hedge Funds

Abstract

This paper investigates the determinants of money-flows, nature of managerial incentives, behavior of investors, and drivers of performance in the hedge fund industry. It examines performance-flow relation and finds that funds with good recent performance, greater managerial incentives, and lower impediments to capital withdrawals experience higher money-flows. It also analyzes how current money-flows relate to future performance and finds that larger funds with greater inflows are associated with poorer future performance, a result consistent with decreasing returns to scale. It also finds that funds with greater managerial incentives are associated with superior future performance, justifying investors' preference for funds with higher managerial incentives.