The Performance of Hedge Fund Performance Fees
Justin Birru and
No 27454, NBER Working Papers from National Bureau of Economic Research, Inc
We study the long-run outcomes associated with hedge funds' compensation structure. Over a 22-year period, the aggregate effective incentive fee rate is 2.5 times the average contractual rate (i.e., around 50% instead of 20%). Overall, investors collected 36 cents for every dollar earned on their invested capital (over a risk-free hurdle rate and before adjusting for any risk). In the cross-section of funds, there is a substantial disconnect between lifetime performance and incentive fees earned. These poor outcomes stem from the asymmetry of the performance contract, investors' return-chasing behavior, and underwater fund closures.
JEL-codes: G11 G23 (search for similar items in EconPapers)
Note: AP CF
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