Finding Fortune: How Do Institutional Investors Pick Asset Managers?

75 Pages Posted: 21 Jun 2016 Last revised: 5 Nov 2019

See all articles by Gregory W. Brown

Gregory W. Brown

University of North Carolina (UNC) at Chapel Hill - Finance Area

Oleg Gredil

Tulane University - A.B. Freeman School of Business

Preetesh Kantak

Kelley School of Business

Date Written: November 4, 2019

Abstract

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

Brown, Gregory W. and Gredil, Oleg and Kantak, Preetesh, Finding Fortune: How Do Institutional Investors Pick Asset Managers? (November 4, 2019). Available at SSRN: https://ssrn.com/abstract=2797874 or http://dx.doi.org/10.2139/ssrn.2797874

Gregory W. Brown

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Oleg Gredil

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Preetesh Kantak (Contact Author)

Kelley School of Business ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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