You Want Hedge Funds Who Have Skin In The Game

A number of studies have noted over the years that companies with the highest insider ownership, tend to outperform peers. The logic behind this conclusion is easy to understand. Managers who own a significant chunk of shares are unlikely to embark on value-destructive acquisitions or put to their company at risk as they stand to lose more than most other investors.

The same logic should be true of investment funds, particularly hedge funds and partnerships. If the chief investment officer, founder or managing partner owns a significant equity stake in the business, they are less likely to take excessive risk and should, in theory, achieve better returns for investors.

After all, not only will they benefit from extra management and...