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Role of managerial incentives and discretion in hedge fund performance

Subject

Finance

Publishing details

BNP Paribas Hedge Fund Centre Working Paper Series

Authors / Editors

Agarwal v; Daniel N D; Naik N Y

Biographies

Publication Year

2007

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 delta of option-like incentive fee contracts, managerial ownership, and high-water mark provisions, are associated with superior performance. 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, employing different econometric specifications, permitting nonlinearity for managerial discretion, and controlling for different data-related biases.

Publication Notes

This is a revision of HF - 019

Publication Research Centre

Hedge Fund Centre

Series Number

HF-023

Series

BNP Paribas Hedge Fund Centre Working Paper Series