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This Article provides the first comprehensive scholarly analysis of the internal governance of hedge funds. Hedge fund governance consists of the funds' underlying legal regime and the practices they adopt in response to lacking permanent capital and to reduce agency costs. Hedge fund governance is important because better governance can improve investor returns and help managers raise and retain capital. I argue that hedge fund governance is best understood as a type of responsive managerialism. It is a type of managerialism because applicable law and contracting structures give managers uniquely wide-ranging control over the fund and its operations. Hedge fund governance is also uniquely responsive, however, because managers must continually satisfy investors, due to their ability to shut down a fund by withdrawing their capital.

In addition to their underlying legal regime, the primary components of hedge fund governance are investors with a strong propensity to exercise their short term redemption rights, managers with high pay-performance sensitivity, investor demand for quality governance, and close monitoring by short-term creditors and derivatives counterparties. On balance, hedge fund governance devices seem to prevent managers from pursuing their own interests at the expense of investors. Nonetheless, there is still plenty of room for hedge fund governance to improve. Accordingly, this Article provides a normative framework and principles for improving hedge fund governance by striking a better balance between governance devices that are investor-friendly and those that empower managers. My analysis suggests that the areas in which hedge fund governance needs the most improvement are performance reporting (valuation) and the timing of performance-fee calculations. Importantly, my analysis also suggests that investors may benefit from less disclosure, higher fees, and less access to their capital.