Janice and Robert McNair Hall
Houston, TX 77005
Institutional Affiliation: Rice University
NBER Working Papers and Publications
|July 2019||Skin or Skim? Inside Investment and Hedge Fund Performance|
with Arpit Gupta: w26113
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.