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We use a comprehensive data set of funds-of-funds to investigate performance, risk, and capital formation in the hedge fund industry from 1995 to 2004. While the average fund-of-funds delivers alpha only in the period between October 1998 and March 2000, a subset of funds-of-funds consistently delivers alpha. The alpha-producing funds are not as likely to liquidate as those that do not deliver alpha, and experience far greater and steadier capital inflows than their less fortunate counterparts. These capital inflows attenuate the ability of the alpha producers to continue to deliver alpha in the future. Copyright (c) 2008 The American Finance Association.

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes.You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. licence. www.econstor.eu by the delta of the option-like incentive fee contracts, higher levels of managerial ownership, and the inclusion of high-water mark provisions in the incentive contracts, are associated with superior performance. The incentive fee percentage rate by itself does not explain performance. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicatedWe also find that funds with a higher degree of managerial discretion, proxied by longer lockup, notice, and redemption periods, deliver superior performance. These results are robust to using alternative performance measures and controlling for different data-related biases. __________________________________________Agarwal is from Georgia State University and works with the Center for Financial Research, University of Cologne; Daniel is from Drexel University; and Naik is from London Business School. We thank an anonymous referee for insightful comments and suggestions that substantially improved the paper, and Robert F. Stambaugh (the editor) for valuable guidance and insights. We would also like to thank Bruno Biais, Nicole Boyson, Conrad Ciccotello, Jeff Coles, Ben Esty, Patrick Fauchier, Miguel Ferreira, William Fung, Gerald Gay, Mila Getmansky, David Goldreich, Paul Gompers, William Goetzmann, Jason Role of managerial incentives and discretion in hedge fund performance Do higher managerial incentives and greater managerial discretion lead to better performance?While the prior corporate finance literature has examined this question, the results are hard to interpret given significant endogeneity concerns. We believe that the hedge fund industry offers an interesting setting to examine these issues. The central contribution of this paper is to demonstrate empirically that, in the case of hedge funds, managerial incentives and discretion are associated with better performance.Why are hedge funds better suited to study these issues? First, we are able to empirically test theoretical predictions that are difficult to test in the corporate finance setting. For ex...