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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

2006

Abstract

Using a comprehensive database of hedge funds, we examine the role of managerial incentives and discretion in the performance of hedge funds. We find that hedge funds with greater managerial incentives as proxied by delta of option-like incentive fee contract, managerial ownership, and high-water mark provision are associated with superior performance. Incentive fees have no explanatory power for future returns. We also find that funds with higher degree of managerial discretion, proxied by longer lockup, notice, and redemption periods, are associated with superior performance. Our results are robust to various alternate specifications including using alternative performance measures, allowing for nonlinearity for managerial discretion, using different econometric specifications, and controlling for different data-related biases.

Publication Notes

This paper has been revised and replaced by HF-0??

Publication Research Centre

Hedge Fund Centre

Series Number

HF-019

Series

BNP Paribas Hedge Fund Centre Working Paper Series