Skip to main content
Open Access Publications from the University of California

UC Irvine

UC Irvine Electronic Theses and Dissertations bannerUC Irvine

The Optimal Size of Hedge Funds: Conflict between Investors and Fund Managers


This study examines whether the standard compensation contract in the hedge fund industry aligns managers' incentives with the interests of investors. We demonstrate empirically that managers' compensation increases when fund assets grow, even when there are diseconomies of scale in fund performance. Under the current fee structure, managers' compensation is maximized at a much larger size than is optimal for fund performance. Therefore, hedge fund managers have strong incentives to increase their assets under management. However, to avoid capital outflows and retain fund assets, managers are also motivated to restrict fund growth to maintain style-average performance, which explains why funds sometimes close themselves to new investment.

Main Content
For improved accessibility of PDF content, download the file to your device.
Current View