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Institutional Investment and Intermediation in the Hedge Fund Industry

47 Pages Posted: 2 Jul 2013  

Vikas Agarwal

Georgia State University; University of Cologne - Centre for Financial Research (CFR)

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Sugata Ray

University of Alabama - Department of Economics, Finance and Legal Studies

Date Written: June 2013

Abstract

Using new data on the hedge fund investments of institutional investors, this paper is the first to examine the determinants and consequences of intermediation in the hedge fund industry. Our empirical analysis reveals several findings consistent with predictions from the theoretical literature. First, larger investors are more likely to invest directly with hedge funds instead of using intermediated channels. Second, institutions investing directly tend to outperform their intermediary-using counterparts. The inferior performance of institutions using intermediaries reflects: (i) worse performance on their few direct hedge fund investments and (ii) their larger allocation to funds of hedge funds that are known to perform worse than direct hedge fund investments. Taken together, these findings suggest an equilibrium in which larger institutions enjoy economies of scale, enabling direct investment into relatively better performing hedge funds. As institutional size and the number of hedge fund investments increase, the returns from direct investment do exhibit a decline, suggesting eventual scale diseconomies.

Keywords: Institutional investors, intermediation, hedge funds, investment consultants, funds of hedge funds

Suggested Citation

Agarwal, Vikas and Nanda, Vikram K. and Ray, Sugata, Institutional Investment and Intermediation in the Hedge Fund Industry (June 2013). Available at SSRN: https://ssrn.com/abstract=2288102 or http://dx.doi.org/10.2139/ssrn.2288102

Vikas Agarwal

Georgia State University ( email )

35 Broad Street,
Suite 1221
Atlanta, GA 30303-3083
United States
404-413-7326 (Phone)
404-413-7312 (Fax)

HOME PAGE: http://www.gsu.edu/~fncvaa

University of Cologne - Centre for Financial Research (CFR)

Albertus-Magnus Platz
Cologne, 50923
Germany

Vikram Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Sugata Ray (Contact Author)

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States

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