Neng Wang

The Economics of Hedge Funds

Coauthor(s): Yingcong Lan, Jinqiang Yang.


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Hedge fund managers trade o the benefits of leveraging on the alpha-generating strategy against the costs of inefficient fund liquidation. In contrast to the standard risk-seeking intuition, even with a constant-return-to-scale alpha-generating strategy, a risk-neutral manager becomes endogenously risk-averse and decreases leverage following poor performance to increase the fund's survival likelihood. Our calibration suggests that management fees are the majority of the total compensation. Money flows, managerial restart options, and management ownership increase the importance of high-water-mark-based incentive fees but management fees remain the majority. Investors' valuation of fees are highly sensitive to their assessments of the manager's skill.

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Source: Journal of Financial Economics
Exact Citation:
Lan, Yingcong, Neng Wang, and Jinqiang Yang. "The Economics of Hedge Funds." Journal of Financial Economics 110, no. 2 (November 2013): 300-323.
Volume: 110
Number: 2
Pages: 300-323
Date: 11 2013