The geography of hedge funds
Abstract
This articleanalyzes the relationship between the risk-adjusted performance of hedge funds andtheir proximity to investments using data on Asia-focused hedge funds. I find, relative to anaugmented Fung and Hsieh (2004) factor model, that hedge funds with a physicalpresence (head or research office) in their investment region outperform other hedge funds by3.72% per year. The local information advantage is pervasive across all majorgeographical regions, but is strongest for emerging market funds and fundsholding illiquidsecurities. These results are robust to adjustments for fund fees, serialcorrelation, backfill bias,and incubation bias. I show also that distant funds, especially those based in the UnitedStates and the United Kingdom, are able to raise more capital, charge higher fees, and setlonger redemption periods, despite their underperformance relative to nearby funds. Itappears that distant funds trade investment performance for better access tocapital.