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Does individualism matter for hedge funds? A cross-country examination

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  • Dai, Na
  • Nahata, Rajarishi
  • Brauner, Aaron

Abstract

We examine how individualism, a cultural attribute that emphasizes autonomy, ability, and self-belief, affects hedge funds (HFs). Using Hofstede's framework, we show HFs located in individualistic (IDV) cultures structure their contracts with more performance-driven incentives, take greater risk, and herd less. Individualism also influences risk-shifting behavior: after initial underperformance, HFs increase risk-taking in high IDV cultures. Yet, HFs do not outperform in individualistic countries and draw lower Sharpe ratios, which highlights the link between individualism and overconfidence/over-optimism. Interestingly, HFs' survival is less sensitive to performance in individualistic cultures, again consistent with greater autonomy and opportunities in these countries.

Suggested Citation

  • Dai, Na & Nahata, Rajarishi & Brauner, Aaron, 2022. "Does individualism matter for hedge funds? A cross-country examination," Journal of Corporate Finance, Elsevier, vol. 72(C).
    • Handle: RePEc:eee:corfin:v:72:y:2022:i:c:s0929119921002777
    DOI: 10.1016/j.jcorpfin.2021.102155
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