Hedge fund incentives, management commitment and survivorship
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Management ownership in hedge funds sends conflicting signals—signals which reduce investors’ perception of survivorship risk. We document that decisions on management ownership are purposely self-selected. Such decisions are most likely motivated by unique incentive mechanisms imbedded in hedge funds. We examine the impact of managerial ownership decisions on fund survivorship risk by accounting for unobserved fund manager motivations that affect both ownership decisions and survivorship risk. Our findings suggest that the conventional argument that having management commitment can reduce survival risk (and therefore align the interests between managers and investors) is significantly overstated. These results are robust to using alternative ownership measures and controlling for different samples.
KeywordsHedge fund incentive Endogeneity Management ownership Survivorship risk
JEL ClassificationC34 G23 G32
We are grateful to Stephen Brown, Helen Bollaert, Simba Chang, Eric Debodt, Giuseppe DeFeo, Joseph Fan, William Greene, Paul Healy, Jens Jackwerth, Stan Panis, Markus Schmid, Armin Schwienbacher and David Yermack, as well as seminar participants at the University of Western Australia, University of Queensland, Curtin University and SKEMA (Lille, France), for helpful discussions and comments. We are also grateful to Mila Getmansky for providing us with the return smoothing code. We are responsible for all errors.
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