Hedge Fund Franchises

Management Science, Forthcoming

54 Pages Posted: 24 Dec 2014 Last revised: 11 Dec 2018

See all articles by William Fung

William Fung

PI Asset Management, LLC

David A. Hsieh

Duke University - Fuqua School of Business; Duke University - Department of Economics; National Bureau of Economic Research (NBER)

Narayan Y. Naik

London Business School - Institute of Finance and Accounting

Melvyn Teo

Singapore Management University - Lee Kong Chian School of Business

Date Written: December 10, 2017

Abstract

We investigate the growth strategies of hedge fund firms. We find that firms with successful first funds are able to launch follow-on funds that charge higher performance fees, set more onerous redemption terms, and attract greater inflows. Motivated by the aforementioned spillover effects, first funds outperform follow-on funds, after adjusting for risk. Consistent with the agency view, greater incentive alignment moderates the performance differential between first and follow-on funds. Moreover, multiple-product firms underperform single-product firms but harvest greater fee revenues, thereby hurting investors while benefitting firm partners. Investors respond to this growth strategy by redeeming from first funds of firms with follow-on funds that do poorly. Empirically, the multiple-product firm has become the dominant business model for the hedge fund industry.

Keywords: hedge funds, first funds, follow-on funds, spillover, agency problems

Suggested Citation

Fung, William (Bill) and Hsieh, David Arthur and Naik, Narayan Y. and Teo, Melvyn, Hedge Fund Franchises (December 10, 2017). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2542476 or http://dx.doi.org/10.2139/ssrn.2542476

William (Bill) Fung

PI Asset Management, LLC ( email )

79 Wellington Street West
Suite 3500
Toronto, Ontario M5K 1K7
Canada

David Arthur Hsieh

Duke University - Fuqua School of Business ( email )

Department of Finance
Box 90120
Durham, NC 27708-0120
United States
919-660-7779 (Phone)
919-660-7961 (Fax)

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Narayan Y. Naik

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 (Phone)
+44 20 724 3317 (Fax)

Melvyn Teo (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore
+65 6828 0735 (Phone)
+65 6822 0777 (Fax)

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