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.
28 (1) Journal of Taxation and Regulation of Financial Institutions 27-42 (September-October, 2014)