Publication Type

Journal Article

Version

publishedVersion

Publication Date

2-2021

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, franchises, multiple product firms, agency problems, spillovers

Discipline

Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

Publication

Management Science

Volume

67

Issue

2

First Page

1199

Last Page

1225

ISSN

0025-1909

Identifier

10.1287/mnsc.2019.3516

Publisher

INFORMS (Institute for Operations Research and Management Sciences)

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1287/mnsc.2019.3516

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