Would Hedge Fund Investors Benefit From Paying Operating Expenses?

Abstract

The standard hedge fund contract calls for the manager to pay all the expenses, an arrangement that may hurt investors. A profit-maximizing manager would not make some expenditures that might increase total returns, as the manager pays all the costs and gets only some of the benefit. The manager will outsource with prime brokers or accountants even if those services could be provided more efficiently internally. An inefficient risk-sharing creates incentives for the manager to make the wrong investments from the viewpoint of the investors.