Skin in the Game versus Skimming the Game: Governance, Share Restrictions and Insider Flows

Hedge-fund managers justify share restrictions as means of protecting the common interest of the shareholders. However, this paper advances that such restrictions can adversely induce information asymmetry between managers and their clients about future fund flows.

Author(s):

Ronnie Sadka

Boston College

The paper demonstrates that share-restricted funds with recent outflows underperform funds with recent inflows by about 5.6% annually over 1998—2008. No such return spread is observed for funds with low-share restrictions. As managers may also act as investors in their own funds, the information asymmetry potentially allows them to profit by trading in advance of their clients. Consistent with this hypothesis, funds exhibit significant capital outflows following a decrease in managerial allocation. The flow return spread is also more pronounced in funds managing insider wealth, as well as in funds with low levels of corporate governance. Moreover, the flow of low-fee funds leads that of high-fee funds within the same hedge-fund family, suggesting that fund insiders enter or exit the fund prior to outside investors. The results suggest that private information about the fund, not only about the fundamental value of its assets, may constitute material information. Such private information engenders potential conflict of interest between fund managers and investors, with implications for proper fund governance as well as appropriate disclosure policy concerning managerial actions.

Type: Working paper
Date: le 07/11/2011
Research Cluster : Finance

See Also

EDHEC Faculty welcomes Oxford professor Renée B. Adams for a reseach seminar
News
- 11-09-2019
On September 12, 2019, EDHEC faculty will be delighted to welcome Oxford professor...
Riccardo Rebonato will unveil the results of the 12th EDHEC-Risk European ETF & Smart Beta Survey on Sept 23 in London
News
- 03-09-2019
Riccardo Rebonato, Professor of Finance, EDHEC Business School, EDHEC-Risk Institute,...
Launch of the
News
- 03-09-2019
EDHEC Business School and Scientific Beta have announced the launch of the “Advanced...
8 professors appointed in 2019-2020
News
- 27-08-2019
EDHEC Business School appointed 8 new professors for the 2019-2020 academic year. Six...