Manager Characteristics and Hedge Fund Returns, Liquidity, and Survival

Existing empirical studies assert that there is significant cross-sectional variation in the risk-adjusted returns of hedge funds, and that their performance is affected by manager characteristics such as education. However, when analyzing the impact of manager characteristics, prior research does not control for the difference in liquidity. In this study we find that manager education affects the liquidity of hedge fund shares and assets; on average, managers educated in elite institutions impose stronger share restrictions and thus can better manage illiquid assets to generate a liquidity premium. We also find that manager education affects the survival of hedge funds, but that the CFA designation has a stronger impact. From 1994 to 2015, the hazard rate of CFA funds was 13.6% lower, and the difference was significant after controlling for risk, return, and investment style effects. Our findings are important because the search and due diligence process is costly for investors such as pension funds-and survival rates reduce costs.