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Do mutual funds lose talent to hedge funds? Evidence from China

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  • Hong, Xin
  • Kang, Di
  • Wang, Zhibin

Abstract

This paper examines the effect of rapid expansion of the hedge fund industry on mutual fund managerial turnovers. Deuskar et al. (2011) find that mutual funds retain skilled managers by offering side-by-side arrangements. We find that talented fund managers tend to leave mutual funds and establish their own hedge funds when side-by-side arrangements are not feasible. Mutual fund returns and flows decrease if their managers leave mutual funds to establish hedge funds, especially when the hedge fund industry is growing rapidly and performing well. Both institutional and retail investors react to this managerial turnover by reducing net flows.

Suggested Citation

  • Hong, Xin & Kang, Di & Wang, Zhibin, 2021. "Do mutual funds lose talent to hedge funds? Evidence from China," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 679-689.
    • Handle: RePEc:eee:reveco:v:75:y:2021:i:c:p:679-689
    DOI: 10.1016/j.iref.2021.04.030
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    References listed on IDEAS

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    1. Leonard Kostovetsky, 2017. "Brain Drain: Are Mutual Funds Losing Their Best Minds?," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 7(03), pages 1-38, September.
    2. Fang, Jieyan & Kempf, Alexander & Trapp, Monika, 2014. "Fund Manager Allocation," Journal of Financial Economics, Elsevier, vol. 111(3), pages 661-674.
    3. Khorana, Ajay, 2001. "Performance Changes following Top Management Turnover: Evidence from Open-End Mutual Funds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(3), pages 371-393, September.
    4. Mazur, Mieszko & Salganik-Shoshan, Galla & Zagonov, Maxim, 2017. "Comparing performance sensitivity of retail and institutional mutual funds’ investment flows," Finance Research Letters, Elsevier, vol. 22(C), pages 66-73.
    5. Tom Nohel & Z. Jay Wang & Lu Zheng, 2010. "Side-by-Side Management of Hedge Funds and Mutual Funds," The Review of Financial Studies, Society for Financial Studies, vol. 23(6), pages 2342-2373, June.
    6. Prachi Deuskar, 2011. "The Good or the Bad? Which Mutual Fund Managers Join Hedge Funds?," The Review of Financial Studies, Society for Financial Studies, vol. 24(9), pages 3008-3024.
    7. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    8. Richard B. Evans & Rüdiger Fahlenbrach, 2012. "Institutional Investors and Mutual Fund Governance: Evidence from Retail--Institutional Fund Twins," The Review of Financial Studies, Society for Financial Studies, vol. 25(12), pages 3530-3571.
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    12. Bryant, Lonnie L., 2012. "“Down but Not Out” mutual fund manager turnover within fund families," Journal of Financial Intermediation, Elsevier, vol. 21(4), pages 569-593.
    13. Wang, Yaping & Ko, Kwangsoo, 2017. "Implications of fund manager turnover in China," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 99-106.
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    17. Richard Fu & Lei Wedge, 2011. "Board Independence and Mutual Fund Manager Turnover," The Financial Review, Eastern Finance Association, vol. 46(4), pages 621-641, November.
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    More about this item

    Keywords

    Mutual funds; Hedge funds; Managerial turnover;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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