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The Performance of Hedge Fund Performance Fees

Itzhak Ben-David, Justin Birru, Andrea Rossi

NBER Working Paper No. 27454
Issued in June 2020
NBER Program(s):Asset Pricing, Corporate Finance

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.

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Document Object Identifier (DOI): 10.3386/w27454

 
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