The data also found that these firms deliberately remained as smaller funds even when the opportunity to attain more assets was on the table. In short both researchers believed that having managers and investors better aligned over incentives could only generate positive results. Therefore, they allocate their capital to the better fund managers.
Gupta and Sachdeva believe one possible reason could be, Hedge Fund Managers prioritise those funds that contain more of their personal investments, putting those funds under the control of their best portfolio managers.Īlternatively, they believe that inside investors are better informed about managerial ability within the fund family. Just one-standard-deviation increase in investment resulted in 1.4% to 1.7% in excess returns annually. Additionally, they found that these funds were comparatively small and outperformed on a risk adjusted basis. They found that funds with no outside capital earned 4.3% higher excess returns annually compared to funds with only outside investment. Authors of the paper Arpit Gupta and Kunal Sachdeva, looked at the characteristics of investors and the performance of 720 Hedge Funds. The research was carried out using HFR, EurekaHedge, eVestment and CISDM. These funds not only earn more but are less sensitive to performance driven flows.
#Hedge fund manager skin
NYU and Columbia University found that funds where the Hedge Fund Manager had skin in the game outperform but tend to keep small funds.
Studies find Hedge Fund Managers with “skin in the game” outperformįunds which rely more on insider money outperform funds that use asset gathering
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