Finding Fortune: How Do Institutional Investors Pick Asset Managers?
75 Pages Posted: 21 Jun 2016 Last revised: 5 Nov 2019
Date Written: November 4, 2019
We propose and test a framework of private information acquisition and decision timing for asset allocators hiring outside investment managers. Using unique data on due diligence interactions between an allocator and 860 hedge funds, we find that the production of private information complements (substitutes) public information at the intensive (extensive) margin. Our allocator strategically chooses the precision at which to acquire private signals, reducing due diligence time by 58% and improving outcomes. Selected funds outperform unselected funds by 9.0% over 20 months. This outperformance is related to the allocator learning about fund return-to-scale constraints and manager skill before other investors.
Keywords: Asset Management, Decreasing Return to Scale, Due Diligence, Hedge Funds, Information Choice, Institutional Investors, Learning, Private Information
JEL Classification: D81, D83, G11, G23
Suggested Citation: Suggested Citation