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)
Citation
FUNG, William; HSIEH, David; NAIK, Narayan; and TEO, Melvyn.
Hedge fund franchises. (2021). Management Science. 67, (2), 1199-1225.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/5964
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1287/mnsc.2019.3516
