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Skin or Skim? Inside Investment and Hedge Fund Performance

Author

Listed:
  • Arpit Gupta

    (Leonard N. Stern School of Business, New York University, New York, New York 10012)

  • Kunal Sachdeva

    (Stephen M. Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109)

Abstract

Hedge fund managers contribute substantial personal capital, or “skin in the game,” into their funds. Although these allocations may better align incentives, managers may also strategically allocate their private capital in ways that negatively affect outside investors. We find that funds with more inside investment outperform other funds within the same family. This relationship is driven by managerial decisions to invest their own capital in their least-scalable strategies and restrict the entry of new outsider capital into these funds. Our results suggest that insider capital may work as a rent-extraction mechanism at the expense of fund participation of outside investors.

Suggested Citation

  • Arpit Gupta & Kunal Sachdeva, 2025. "Skin or Skim? Inside Investment and Hedge Fund Performance," Management Science, INFORMS, vol. 71(4), pages 3357-3383, April.
    • Handle: RePEc:inm:ormnsc:v:71:y:2025:i:4:p:3357-3383
    DOI: 10.1287/mnsc.2024.4984
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