Download this Paper Open PDF in Browser

Role of Managerial Incentives and Discretion in Hedge Fund Performance

53 Pages Posted: 8 Mar 2006 Last revised: 11 Oct 2008

Vikas Agarwal

Georgia State University; University of Cologne - Centre for Financial Research (CFR)

Naveen D. Daniel

Drexel University - Department of Finance

Narayan Y. Naik

London Business School - Institute of Finance and Accounting

Abstract

Using a comprehensive hedge fund database, we examine the role of managerial incentives and discretion in hedge fund performance. Hedge funds with greater managerial incentives, proxied by the delta of the option-like incentive fee contracts, higher levels of managerial ownership, and the inclusion of high-water mark provisions in the incentive contracts, are associated with superior performance. The incentive fee percentage rate by itself does not explain performance. We also find that funds with a higher degree of managerial discretion, proxied by longer lockup, notice, and redemption periods, deliver superior performance. These results are robust to using alternative performance measures and controlling for different data-related biases.

Keywords: Hedge Funds, Managerial Incentives, Discretion, Performance, Delta, Lockup Period

JEL Classification: G10, G19, G23

Suggested Citation

Agarwal, Vikas and Daniel, Naveen D. and Naik, Narayan Y., Role of Managerial Incentives and Discretion in Hedge Fund Performance. Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=889008 or http://dx.doi.org/10.2139/ssrn.889008

Vikas Agarwal (Contact Author)

Georgia State University ( email )

35 Broad Street,
Suite 1221
Atlanta, GA 30303-3083
United States
404-413-7326 (Phone)
404-413-7312 (Fax)

HOME PAGE: http://www.gsu.edu/~fncvaa

University of Cologne - Centre for Financial Research (CFR)

Albertus-Magnus Platz
Cologne, 50923
Germany

Naveen D. Daniel

Drexel University - Department of Finance ( email )

LeBow College of Business
Philadelphia, PA 19104
United States
215-895-5858 (Phone)
215-895-2955 (Fax)

HOME PAGE: http://lebow.drexel.edu/Faculty/DanielN

Narayan Y. Naik

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 (Phone)
+44 20 724 3317 (Fax)

Paper statistics

Downloads
1,577
Rank
8,436
Abstract Views
5,322