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