Finding Fortune: How Do Institutional Investors Pick Asset Managers?

52 Pages Posted: 21 Jun 2016 Last revised: 16 Mar 2021

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: February 25, 2021

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 institutional allocator and 860 hedge fund managers, we find that the production of private information complements public information. The allocator strategically chooses how much proprietary information to collect, reducing due diligence time by 18 months and improving outcomes. Selected funds outperform unselected funds by 9% over 20 months. The outperformance relates to the allocator learning about fund return-to-scale constraints and manager skill before other investors.

Keywords: Asset Management, Hedge Funds, Decreasing Return to Scale, Due Diligence, 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? (February 25, 2021). 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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