The Performance of Hedge Fund Performance Fees

Ben‐David, Itzhak; Birru, Justin; Rossi, Andrea

doi:10.2139/ssrn.3630723

Cited by 2 publications

(3 citation statements)

References 45 publications

(78 reference statements)

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“…However, effectively the performance fees constitute even a larger portion of realized returns because investors cannot offset gains and losses across funds, they tend to withdraw capital after a poor past performance, and managers sometimes terminate hedge funds after large losses, which renders the high water mark provision irrelevant. (Ben-David et al, 2020) find that due to these three reasons the effective performance fees approach one-half of the aggregate gross profits. The high level of hedge fund managers' participation in realized returns strongly incentivizes them to perform and it allows successful managers to earn compensation similar to what they would earn in mutual funds 10 times their hedge fund size (Connor & Woo, 2004;Jobman, 2002).…”

Section: Hedge Fund Characteristicsmentioning

confidence: 95%

“…Furthermore, hedge funds charge investors high management and performance fees. Ben-David et al (2020) estimate that for every dollar of gross excess return earned by a hedge fund, on average, 64 cents are paid in management and incentive fees and only 36 cents are collected by the investors. Given the magnitude of these fees, it is surprising that hedge funds keep attracting growing amounts of capital.…”

Section: Introductionmentioning

confidence: 99%

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Hedge Fund Performance: A Quantitative Survey

Yang¹,

Havránek²,

Iršová³

et al. 2022

Preprint

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We provide the first quantitative survey of the empirical literature on hedge fund performance. We examine the impact of potential biases on the reported results. Empirical analysis in prior studies has been plagued by fragmentation of underlying data and by limited consensus on how hedge fund performance should be measured. Using a sample of 1,019 intercept terms from regressions of hedge fund returns on risk factors (the “alphas”) collected from 74 studies published between 2001 and 2021 we show that inferences about hedge fund returns are not significantly contaminated by publication selection bias. Most of our monthly alpha estimates adjusted for the (small) bias fall within a relatively narrow range of 30 to 40 basis points. Considering several partitions of our sample, we document a modest publication bias only for estimates based on instrumental variables (IV), for which relatively large standard errors are common and that tend to be less precise. In contrast, studies that explicitly control for the potential biases in the underlying data (e.g. the backfilling bias and the survivorship bias) report lower alphas. Our results demonstrate that despite the prevalence of the publication selection bias in numerous other research settings, publication may not be selective when there is no strong a priori theoretical prediction about the sign of estimated coefficients, which may induce greater readiness to publish statistically insignificant results.

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Section: Hedge Fund Characteristicsmentioning

confidence: 95%

Section: Introductionmentioning

confidence: 99%

Hedge Fund Performance: A Quantitative Survey

Yang¹,

Havránek²,

Iršová³

et al. 2022

Preprint

View full text Add to dashboard Cite

show abstract

“…7 While the option theory application to performance fees is well documented, most articles present analysis from the perspective of hedge funds and the like. Similarly, many empirical studies on performance fees focus on alternative investments (see, for example, Ackermann, McEnally, and Ravenscraft 1999;Agarwal, Daniel, and Naik 2009;Ben-David, Birru, and Rossi 2020;Brown, Goetzmann, and Liang 2005;Brown, Goetzmann, and Park 2001). Although some articles have examined long-only managers using mutual fund data (see, for example, Elton, Gruber, and Blake 2003;Golec and Starks 2004;Drago, Lazzari, and Navone 2005;Díaz-Mendoza, López-Espinosa, and Martínez 2014;Servaes and Sigurdsson 2018), we are not aware of any that have specifically looked at systematic managers.…”

mentioning

confidence: 99%

On the Valuation of Performance Fees and Their Impact on Asset Managers’ Incentives

Dai¹,

Merton²,

Savina³

2021

JAI

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This article provides a practical framework for assessing performance fees based on standard option pricing models. The fee valuation does not require any expected return or alpha estimate, making this framework transparent, robust, and widely applicable.n Using the framework, the authors show the incentive impact of performance fees and caution against the unintended consequences for manager behaviors.n The article discusses the implications of performance fees in the context of systematic investing. This discussion is especially relevant today as asset owners are increasingly interested in the broader adoption of performance fee structures beyond traditional alternative investments.

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The Performance of Hedge Fund Performance Fees

Cited by 2 publications

References 45 publications

Hedge Fund Performance: A Quantitative Survey

Hedge Fund Performance: A Quantitative Survey

On the Valuation of Performance Fees and Their Impact on Asset Managers’ Incentives

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