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Under one roof: A study of simultaneously managed hedge funds and funds of hedge funds

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  • Agarwal, Vikas
  • Lu, Yan
  • Ray, Sugata

Abstract

We examine the simultaneous management of hedge funds and funds of hedge funds. Hedge fund firms can choose to simultaneously offer a fund of hedge funds. Similarly, fund of hedge fund firms can simultaneously offer a hedge fund. We find that while superior past performance and larger size drive the decision to become simultaneous for hedge fund firms, past flows drive the decision for funds of hedge fund firms. The effects of simultaneity are also different. When hedge fund firms start funds of hedge funds, we find evidence of value creation, driven by better management of economies of scale and cross learning. In contrast, fund of hedge fund firms starting hedge funds destroy value due to expansion beyond core competencies and agency problems. We find that firms learn about their competencies in the two business lines and discontinue underperforming simultaneity arrangements to focus on the business where they perform better.

Suggested Citation

  • Agarwal, Vikas & Lu, Yan & Ray, Sugata, 2014. "Under one roof: A study of simultaneously managed hedge funds and funds of hedge funds," CFR Working Papers 14-13, University of Cologne, Centre for Financial Research (CFR).
    • Handle: RePEc:zbw:cfrwps:1413
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    Cited by:

    1. Clemens Sialm & Zheng Sun & Lu Zheng, 2020. "Home Bias and Local Contagion: Evidence from Funds of Hedge Funds," The Review of Financial Studies, Society for Financial Studies, vol. 33(10), pages 4771-4810.
    2. Hong, Xin, 2014. "The dynamics of hedge fund share restrictions," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 82-99.
    3. Agarwal, Vikas & Ma, Linlin & Mullally, Kevin, 2015. "Managerial multitasking in the mutual fund industry," CFR Working Papers 13-10 [rev.], University of Cologne, Centre for Financial Research (CFR).

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