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Hedge fund franchises

Journal

Management Science

Subject

Finance

Publishing details

Management Science 2021 Vol 67:2 p 1199-1226

Authors / Editors

Fung W;Hsieh D A;Naik N Y;Teo M

Biographies

Narayan Naik

Publication Year

2021

Abstract

We investigate the growth strategies of hedge fund firms. We find that firms with successful first funds are able to launch follow-on funds that charge higher performance fees, set more onerous redemption terms, and attract greater inflows. Motivated by the aforementioned spillover effects, first funds outperform follow-on funds, after adjusting for risk. Consistent with the agency view, greater incentive alignment moderates the performance differential between first and follow-on funds. Moreover, multiple-product firms underperform single-product firms but harvest greater fee revenues, thereby hurting investors while benefitting firm partners. Investors respond to this growth strategy by redeeming from first funds of firms with follow-on funds that do poorly. Empirically, the multiple-product firm has become the dominant business model for the hedge fund industry.

Keywords

Hedge funds; First funds; Follow-on funds; Spillover; Agency problems

Available on ECCH

No


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