Life Cycle Performance of Hedge Fund Managers

We study the life cycle performance of hedge fund managers as one of managerial characteristics to address asymmetric information between hedge fund managers and investors. We are the first to find that hedge fund managers have a hump-shaped life cycle relationship between their work experience and performance. In the early years of their profession, fund managers have serious career concerns and therefore work hard to build up their confidence and expertise. As a result, they exhibit an improving performance. But as their performance steadily ascends, the improvement of the performance is at a decelerating rate as their career concerns start to ebb away and their effort on their jobs is lessened. The performance of an average fund manager usually peaks around 5 years and then begins to deteriorate afterwards. We also find that fund managers with postgraduate degrees have a Sharpe ratio 9.2% higher than their peers without postgraduate degrees and female fund managers have a Sharpe ratio 17.5% above their male peers. Fund managers working at financial centers outperform their peers at non-financial centers due to both sorting and learning effects. However, the outperformance in financial centers gradually diminishes after 10 years. In a natural experiment setting, we find that the stock market crash had a permanent negative impact on the life cycle performance of fund managers, resulting in a 14.7% decline in the Sharpe ratio. Finally, we use the fund level data to test and confirm the two main channels of confidence and career concerns of fund managers that result in their hump-shaped life cycle performance. Taking together, the life cycle work experience of fund managers provides a signal of hedge fund’s performance that could reduce information asymmetry to outside investors.