Under One Roof: A Study of Simultaneously Managed Hedge Funds and Funds of Hedge Funds

Abstract

We examine the practice of simultaneous management of hedge funds and funds of hedge funds. Hedge fund firms can choose to simultaneously offer a fund of hedge funds. Similarly, fund of hedge funds firms can simultaneously offer a hedge fund. We find that while superior past performance drives the decision to become simultaneous in both cases, the effects of simultaneity are different. When hedge fund firms start funds of hedge funds, we find evidence of value creation, driven by better management of economies of scale and cross learning. In contrast, fund of hedge fund firms starting hedge funds destroy value, as a result of expansion beyond core competencies and agency problems. However, we find that the value destruction does not persist as firms discontinue underperforming simultaneity arrangements to focus on the profitable business line.

Keywords: hedge funds, funds of hedge funds (FOF), simultaneous management