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Hedge Fund Franchises

Author

Listed:
  • William Fung

    (Board of Trustees, CFA Institute Research Foundation, Charlottesville, Virginia 22902)

  • David Hsieh

    (Fuqua Business School, Duke University, Durham, North Carolina 27708)

  • Narayan Naik

    (London Business School, London NW1 4SA, United Kingdom)

  • Melvyn Teo

    (Lee Kong Chian School of Business, Singapore Management University, Singapore 178899)

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.

Suggested Citation

  • William Fung & David Hsieh & Narayan Naik & Melvyn Teo, 2021. "Hedge Fund Franchises," Management Science, INFORMS, vol. 67(2), pages 1199-1226, February.
    • Handle: RePEc:inm:ormnsc:v:67:y:2021:i:2:p:1199-1226
    DOI: 10.1287/mnsc.2019.3516
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    References listed on IDEAS

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    Cited by:

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    3. Lee, Jennifer Eunkyeong & Cho, Hoon & Ryu, Doojin & Seok, Sangik, 2023. "Does performance-chasing behavior matter? International evidence," Journal of Multinational Financial Management, Elsevier, vol. 68(C).

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