Working Paper: NBER ID: w26113
Authors: Arpit Gupta; Kunal Sachdeva
Abstract: Hedge fund managers contribute substantial personal capital, or "skin in the game," into their funds. While these allocations may better align incentives, managers may also strategically allocate their private capital in ways that negatively affect investors. We find that funds with more inside investment outperform other funds within the same family. However, this relationship is driven by managerial decisions to invest capital in their least-scalable strategies and restrict the entry of new outsider capital into these funds. Our results suggest that skin in the game may work as a rent-extraction mechanism at the expense of fund participation of outside investors.
Keywords: hedge funds; inside investment; fund performance; managerial incentives
JEL Codes: G23; G32; J33; J54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Insider investment (G24) | Fund size (G23) |
| Insider investment (G24) | Limiting access to outside investors (G24) |
| Insider investment (G24) | Excess returns (G19) |