I recently uploaded my new working paper on hedge fund governance. The paper provides the first comprehensive scholarly analysis of the internal governance of hedge funds. It will be published by the Stanford Journal of Law, Business & Finance in the fall. Click the link above to download the paper or read the full abstract.
Unlike corporations, hedge funds are structured as limited partnerships and don't have the governance mechanisms typically associated with corporations, such as an independent board or the ability to obtain permanent capital from equity investors.
Below are 15 important points or observations about hedge fund governance that I make in the paper:
- hedge fund investors are not being systematically ripped off by managers;
- hedge fund managers have more control over their firms than managers of corporations, mutual funds, and other private investment funds;
- investors have hedge fund managers on a much shorter leash than managers of public corporations and other types of investment funds;
- the oversight role played by hedge fund directors is not substantial;
- hedge fund investors are often better off with less transparency, higher fees, and
less access to their capital;
- only a small portion of hedge funds calculate performance fees on a multi-year basis;
- institutional hedge fund investors often refuse to invest in funds that lack good governance;
- successful hedge fund managers often increase fees when starting new funds;
- the biggest source of hedge fund agency costs is the manipulation of performance returns by managers;
- hedge fund investors price in the risk of fraud and other operational problems by demanding lower fees;
- secondary markets for hedge fund shares help to discipline managers;
- hedge fund leverage results in the funds being closely monitored by creditors and derivatives counterparties;
- hedge funds as a whole are about as leveraged as public corporations;
- clawbacks or deferred performance fee payments may better align the incentives of hedge fund managers and investors;
- when the stock of public corporations rises by 1%, median CEO compensation rises by $200k, but for hedge fund managers, that number is $2 million.
Download the full paper here. Comments are welcome.