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

43 Pages Posted: 27 Aug 2013 Last revised: 12 Feb 2014

See all articles by Vikas Agarwal

Vikas Agarwal

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

Yan Lu

University of Central Florida - College of Business Administration

Sugata Ray

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

Date Written: August 1, 2013

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

Suggested Citation

Agarwal, Vikas and Lu, Yan and Ray, Sugata, Under One Roof: A Study of Simultaneously Managed Hedge Funds and Funds of Hedge Funds (August 1, 2013). Available at SSRN: https://ssrn.com/abstract=2316814 or http://dx.doi.org/10.2139/ssrn.2316814

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

Yan Lu

University of Central Florida - College of Business Administration ( email )

PO Box 161400
Orlando, FL 32816
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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