Fund Selection, Style Allocation, and Active Management Abilities: Evidence from Funds of Hedge Funds’ Holdings

Financial Management, Forthcoming

65 Pages Posted: 18 Jul 2017 Last revised: 25 Dec 2018

See all articles by Chao Gao

Chao Gao

Australian National University, RSFAS

Tim Haight

Loyola Marymount University

Chengdong Yin

Purdue University - Krannert School of Management

Date Written: December 18, 2018

Abstract

This study examines whether funds of hedge funds (FOHFs) provide superior before-fee performance through managers’ fund selection, style allocation, and active management abilities. Using reported holdings of SEC-registered FOHFs, we find that FOHF managers have fund selection abilities, as hedge funds held by FOHFs outperform their style indices and over half of the individual hedge funds in the TASS database. We also find that FOHF managers add value through active management of FOHFs’ holdings, while evidence on their style allocation abilities is mixed. Our findings suggest that FOHFs generate superior before-fee performance and that FOHF managers’ skillset is broader than previously documented. Thus, our study helps explain why FOHFs continue to survive and suggests that FOHF fee structure reform merits consideration.

Keywords: Funds of Hedge Funds, Holdings, Fund Selection, Style Allocation, Active Management.

JEL Classification: G23

Suggested Citation

Gao, Chao and Haight, Tim and Yin, Chengdong, Fund Selection, Style Allocation, and Active Management Abilities: Evidence from Funds of Hedge Funds’ Holdings (December 18, 2018). Financial Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3001166 or http://dx.doi.org/10.2139/ssrn.3001166

Chao Gao

Australian National University, RSFAS ( email )

CBE Building
26C Kingsley Street
Acton, 2601
Australia

Tim Haight

Loyola Marymount University ( email )

7900 Loyola Boulevard
Los Angeles, CA 90045
United States

Chengdong Yin (Contact Author)

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

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