Flows, Performance, and Managerial Incentives in the Hedge Fund Industry

Content Provider	Semantic Scholar
Author	Agarwal, Vikas Daniel, Naveen D. Naik, Narayan Y.
Copyright Year	2003
Abstract	Using a comprehensive database of individual hedge funds and funds of hedge funds, we investigate the determinants of money-flow and performance in the hedge fund industry. We have several important findings. First, good performers in a given year experience significantly larger money-flows in the subsequent year and this performance-flow relation is convex. Second, funds with persistently good (bad) performance attract larger (smaller) inflows compared to those that show no persistence. Third, we find that money-flows are positively associated with managerial incentives measured by the delta of the option-like incentive-fee contract offered to hedge fund managers. Fourth, when we examine the relation between flows and future performance, we find that larger hedge funds with greater inflows are associated with worse performance in the future, a result consistent with decreasing returns to scale in the hedge fund industry. Fifth, we find that funds with better managerial incentives (those with greater delta) are associated with better performance in the future. Finally, we find that unlike individual hedge funds, funds of hedge funds enjoy economies of scale. Overall, these results significantly improve our understanding of the complex interaction between money-flows, performance, and managerial incentives in the hedge fund industry.
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Language	English
Access Restriction	Open
Content Type	Text
Resource Type	Article