Hedge fund franchises

Fung, W, Hsieh, D A, Naik, N and Teo, M (2018) Hedge fund franchises. Management Science. ISSN 0025-1909 (In Press)

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.

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Item Type: Article
Subject Areas: Finance
Subjects: H > Hedge funds
Date Deposited: 24 Feb 2019 22:12
Last Modified: 06 Sep 2019 17:15
URI: http://lbsresearch.london.edu/id/eprint/1062
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