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Private hedge fund firms' incentives and performance: Evidence from audited filings

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  • Mark C. Hutchinson
  • Quang Minh Nhi Nguyen
  • Mark Mulcahy

Abstract

Using an entirely new dataset of audited filings from firms that manage hedge funds, this study examines whether the hedge fund compensation contract aligns managerial incentives and investor interests. Our novel dataset allows us to distinguish between firms focused exclusively on hedge fund management and diversified firms offering products in addition to hedge funds. Our results for compensation data of hedge fund only management firms confirm that compensation increases as assets under management increase, despite increased costs and performance diseconomies of scale. Hedge funds managed by diversified firms have significantly lower performance. A relatively small proportion of the compensation from these firms is generated from hedge funds. The results are consistent with diversified hedge fund firms having weaker alignment between managerial incentives and investment performance.

Suggested Citation

  • Mark C. Hutchinson & Quang Minh Nhi Nguyen & Mark Mulcahy, 2022. "Private hedge fund firms' incentives and performance: Evidence from audited filings," The European Journal of Finance, Taylor & Francis Journals, vol. 28(3), pages 291-306, February.
    • Handle: RePEc:taf:eurjfi:v:28:y:2022:i:3:p:291-306
    DOI: 10.1080/1351847X.2021.1954966
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    Cited by:

    1. Jean-Marc Le Caillec, 2022. "Hypothesis Testing Fusion for Nonlinearity Detection in Hedge Fund Price Returns," Post-Print hal-03739132, HAL.

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