Fundraising in the Hedge Fund Industry

Abstract

I study capital raising process in the hedge fund industry using the Form D filings. I find that hedge funds sold to investors directly outperform hedge funds sold through brokers by 2% (1.6%) per year before fees (after fees). Directly sold funds also have a larger investment size and charge higher fees. These results are consistent with a semi-separating equilibrium in a model of fundraising, where funds optimally choose fees and capital raising channels, and investors endogenously allocate capital across funds. The model suggests that, despite worse performance of broker sold funds, intermediaries may play an important role by helping less sophisticated investors find good investment opportunities and avoid bad investments. JEL Codes: G23, G24.

Keywords: Hedge Funds, Fundraising, Capital Introduction, Intermediary Brokers