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Role of Managerial Incentives and Discretion in Hedge Fund Performance

Vikas Agarwal, Naveen D. Daniel and Narayan Y. Naik
The Journal of Finance
Vol. 64, No. 5 (Oct., 2009), pp. 2221-2256
Published by: Wiley for the American Finance Association
Stable URL: http://www.jstor.org/stable/27735170
Page Count: 36
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Role of Managerial Incentives and Discretion in Hedge Fund Performance
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Abstract

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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