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Role of managerial incentives and discretion in hedge fund performance

  • Agarwal, Vikas
  • Daniel, Naveen D.
  • Naik, Narayan Y.
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    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 the delta of the option-like incentive fee contracts, higher levels of managerial ownership, and the inclusion of high-water mark provisions in the incentive contracts, are associated with superior performance. The 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 and controlling for different data-related biases.

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    File URL: http://econstor.eu/bitstream/10419/57754/1/699888158.pdf
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    Paper provided by University of Cologne, Centre for Financial Research (CFR) in its series CFR Working Papers with number 04-04.

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    Date of creation: 2009
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    Handle: RePEc:zbw:cfrwps:0404
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