Onshore and Offshore Hedge Funds: Are They Twins?
George O. Aragon
Arizona State University (ASU) - Finance Department
University of Massachusetts Amherst - Department of Finance & Operations Management; China Academy of Financial Research (CAFR)
Minnesota State University
March 14, 2008
Contrary to offshore hedge funds, US-registered (“onshore”) funds are subject to strict marketing prohibitions, accredited investor requirements, limited number of investors, and tax disadvantage. We exploit this difference to test predictions about organizational design, capital flow, and fund performance. We find that onshore funds impose stronger share restrictions such as a lockup provision than offshore funds to deter redemptions, but hold more liquid assets to reduce the cost of liquidity- motivated trading. Our results show that capital flows are less sensitive to past performance in onshore funds than in offshore funds due to regulation on advertising, and the flow sensitivity difference affects performance. Liquidity-adjusted alpha is positive and significant (0.94% per month) only for stand-alone onshore funds that have not been affected by excess capital flows from offshore investors through a master-feeder structure.
Number of Pages in PDF File: 42
Keywords: offshore hedge funds, lock-up provision, liquidity risk, master-feeder structure
JEL Classification: G11, G12, G23, G32
Date posted: March 6, 2007 ; Last revised: January 27, 2011
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