The Effects of Management and Provision Accounts on Hedge Fund Returns

Abstract

A characteristic of hedge funds is not only an active portfolio management, but also the allocation of portfolio performance between different accounts, which are the accounts for the external investors, an account for the management firm and a provision account. Despite a lack of transparency in hedge fund market, the strategy of performance allocation is publicly available. This paper shows that these complex performance allocation strategies might explain stylized facts observed in hedge fund returns, such as return persistence, skewed return distribution, bias ratio, or implied increasing risk appetite.

Keywords: Hedge Fund, Sharpe Performance, Persistence of Returns, Bias Ratio, Manager Incentive, Risk Appetite, High Water Mark, Management Account

JEL Classification: G11