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This article provides a comprehensive analysis of the internal governance of hedge funds. The primary components of hedge fund governance are investors with a high propensity to exercise their short-term redemption rights; managers with high pay performance sensitivity, because they are being compensated with an annual performance-based fee plus earnings from their own investment in the funds they manage; sophisticated investors who demand quality governance; and short-term creditors and derivatives counterparties who provide close monitoring. Hedge fund governance needs the most improvement in the areas of performance reporting (valuation) and the timing of performance-fee calculations. Further, counterintuitively, in some circumstances investors may benefit from less disclosure, higher fees, and less access to their capital.


A version of this work previously appeared in the Stanford Journal of Law Business & Finance at 18 Stan. J.L. Bus. & Fin. 141 (2013).