Good point, but if I was the CEO or the third guy from the top, I don't think it would be unreasonable for equity holders to expect that my firm's bankruptcy should be mine as well. Only real way to align incentives. Given the size of most of the large hedge funds, I can see how your argument makes sense if you're a small fish in a big pond, but if you're running a book at a mid-sized or small fund, you're what...3-5 guys away from the top (maybe even less). If you're the head trader of a major strategy, you're probably one guy away and have an incredible amount of leeway to do whatever you like. You should be held accountable personally for the results. The fact that you're not is what leads to reckless betting and bad risk management. In any case, if I had enough to invest in these funds, I would only go in if the head guys were putting a MASSIVE amount of their own net worths into the fund. That's the only way to make sure they're properly motivated to manage the bankroll and to take measured risks. This isn't always 100% effective (see LTCM), but at least I know that they'll be obsessing over the markets the way I do when my own money is on the line. The other strategy is, as you suggested, to diversify your hedge funds and have a little in each...a blowup here or there could be offset by a star performer elsewhere.