Wednesday, 22 February 2017
Last updated 56 min ago
Nov 17 2008 | 12:08pm ET
AllAboutAlpha.com -- Last week, Houman Shadab of George Mason University testified in front of the U.S. Congress’ Committee on Oversight and Government Reform along with George Soros, Ken Griffin, John Paulson, Andrew Lo, Jim Simons and other hedge fund industry participants.
Anyone involved with the hedge fund industry needs to read Shadab’s written testimony or watch the video of his verbal remarks. He has brought together over two years of research to address a variety of topical issues such as the extent to which hedge funds were actually involved with CDSs and CDOs, systemic risk and even hedge fund compensation. You should also check out his working paper to be published next year in the Berkeley Business Law Journal called “The Law and Economics of Hedge Funds: Financial Innovation and Investor Protection” (available here).
AllAboutAlpha.com spoke with Shadab after the hearing today and asked him to elaborate on a few of the points raised in his testimony.
AAA: As you pointed out in your testimony, hurdle rates and high water marks act as a governor on manager compensation - a feature that traditional executive compensation schemes may lack. But isn’t a performance fee still asymmetrical in the manager’s favor? Or is that even a problem?
Shadab: Given how competitive the hedge fund industry is, I’m not sure the asymmetric nature of the performance fee is a problem. There is strong pressure on managers to deliver results satisfactory for investors, meaning: perhaps managers’ greatest incentive to strike the right balance between risk-taking and risk management is preventing investor redemptions down the road. As we are currently witnessing, hedge fund investors aren’t satisfied to simply do less bad than the market. If the hedge fund manager can’t weather the storm, redemptions will follow.
AAA: Did hedge funds start (or at least act as a catalyst for) the mortgage crisis?
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