Determinants and Implications of Fee Changes in the Hedge FundIndustry

We examine the determinants and consequences of changes in hedge fund fee structures.We show that fee changes are asymmetric with much greater incidence of fee increasescompared to fee decreases. We find that managers of younger and smaller funds are morelikely to increase fees after good performance. Investors view the fee increases followinggood performance as a signal of managerial ability only to be disappointed by their worsefuture performance. Taken together, these findings are consistent with opportunisticbehavior of emerging fund managers in expropriating surplus from their investors.