Role of managerial incentives and discretion in hedge fund performance

Agarwal, V, Daniel, N D and Naik, N (2007) Role of managerial incentives and discretion in hedge fund performance. Working Paper. London Business School BNP Paribas Hedge Fund Centre Working Paper Series.

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 delta of optionlike incentive fee contracts, managerial ownership, and highwater mark provisions, are associated with superior performance. 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, employing different econometric specifications, permitting nonlinearity for managerial discretion, and controlling for different datarelated biases.