Hedge fund franchises
Journal
Management Science
Subject
Finance
Publishing details
Authors / Editors
Fung W;Hsieh D A;Naik N Y;Teo M
Biographies
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
