Hedge Fund Franchises
William Fung, David Hsieh, Narayan Naik, Melvyn Teo
Management Science · 2021 · Volume 67 · Issue 2
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. This paper was accepted by Tyler Shumway, finance.
Keywords
hedge funds, spillover, agency problems, first funds, follow-on funds
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