Skin or Skim? Inside Investment and Hedge Fund Performance

Skin or Skim? Inside Investment and Hedge Fund Performance

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

Arpit Gupta and Kunal Sachdeva

NBER

July 2019

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By |2019-07-30T10:46:44-07:00January 1st, 2018|Efficiency/Growth, Financial Regulation, Political Economy, Reference|