The Performance of Hedge Fund Performance Fees

The Performance of Hedge Fund Performance Fees

We study the long-run outcomes associated with hedge funds’ compensation structure. Over a 22-year period, the aggregate effective incentive fee rate is 2.5 times the average contractual rate (i.e., around 50% instead of 20%). Overall, investors collected 36 cents for every dollar earned on their invested capital (over a risk-free hurdle rate and before adjusting for any risk). In the cross-section of funds, there is a substantial disconnect between lifetime performance and incentive fees earned. These poor outcomes stem from the asymmetry of the performance contract, investors’ return-chasing behavior, and underwater fund closures.

Itzhak Ben-David, Justin Birru, and Andrea Rossi

Ohio State University, Fisher College of Business Research Paper Series

June 19, 2020

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By |2020-08-19T14:56:43-07:00August 19th, 2020|Efficiency/Growth, Financial Regulation, Reference|