Side-By-Side Management of Hedge Funds and Mutual Funds

Abstract:     
We examine situations where the same fund manager simultaneously manages mutual funds and hedge funds. We refer to this as side-by-side management. We document 112 such cases involving 189 hedge funds and 304 mutual funds. The 155 side-by-side managed mutual funds in our sample in existence in 2004 managed a total of $123 billion, raising significant concerns for regulators. Proponents of this practice argue that it is essential to hire and retain star performers. Detractors argue that the temptation for abuse is high and the practice should be banned. Our analysis based on various performance metrics shows that side-by-side mutual fund managers significantly outperform peer funds, consistent with this privilege being granted primarily to star performers. Interestingly, side-by-side hedge fund managers under-perform their style category peers, casting further doubt on the idea that conflicts of interest undermine mutual fund investors. Thus, we find no evidence of welfare loss for mutual fund investors due to exploitation of conflicts of interest.

Number of Pages in PDF File: 55

Keywords: Mutual Funds, Hedge Funds, Side-by-Side, Conflicts of Interest, Incentive

JEL Classification: G2, G3

working papers series