Hedge Fund Innovation
65 Pages Posted: 3 Nov 2012 Last revised: 21 Dec 2018
Date Written: December 21, 2018
We document cycles of innovation fueled by early-mover advantages in the hedge-fund industry. Our method involves clustering hedge funds based on their self-reported strategic risk profile at inception. The 'innovative funds', compared with their 'imitators', survive twice as long while having—at 0.76%—three times higher monthly alphas. The outperformance is persistent and robust to fund-family effects, common biases and possible restatements of the reported data. As an aspect of 'skill', innovativeness is associated with higher incentive fees. A feasible investment strategy based on fund innovativeness generates a significant alpha of 0.58% per month.
Keywords: hedge funds, innovation, followers, excess returns, institutional design, first-mover advantage
JEL Classification: G15, G23
Suggested Citation: Suggested Citation