Inside Investment and Hedge Fund Performance Article Added to PRMIA Risk Library

This article documents the role that inside investment plays in managerial compensation and hedge fund performance. Merging against a comprehensive and survivor bias-free dataset of US hedge funds, the authors find that funds with greater "skin in the game" outperform on a factor-adjusted basis. They emphasize the role of capacity constraints in explaining this result: insider funds are smaller, are less likely to accept inflows in response to positive returns, and are more likely to be closed to outside investors. These results suggest that managers earn outsize rents by operating trading strategies further from their capacity constraints when managing their own money. Read the full article here.

Thank you to NYU Stern for making this article available to PRMIA members. One of the authors, Professor Arpit Gupta, teaches in NYU Stern's MS in Risk Management program. Find out more about this program here.