For Better or Worse? Mutual Funds in Side-By-Side Management Relationships With Hedge Funds

39 Pages Posted: 1 Jun 2006  

Gjergji Cici

College of William and Mary - Mason School of Business

Scott Gibson

College of William and Mary - Mason School of Business

Rabih Moussawi

Villanova University - Department of Finance; University of Pennsylvania - The Wharton School

Date Written: December 14, 2006

Abstract

Firms that engage in the simultaneous, or "side-by-side", management of mutual funds and hedge funds have a fiduciary duty to each fund's investors to make portfolio decisions and to execute trades in the most favorable way. This fiduciary duty is put to the test, however, when side-by-side management firms can increase fee income by strategically transferring performance from the mutual funds to the hedge funds they oversee. Our empirical evidence proves consistent with such favoritism. The reported returns of side-by-side mutual funds are significantly less than those of similar mutual funds run by firms that do not also manage hedge funds. A decomposition of reported returns into holdings-return and return-gap components and return-persistence tests also suggest favoritism. Finally, examining a potential wealth transference mechanism, we find evidence consistent with side-by-side mutual funds getting less of a contribution to performance from IPO underpricing than matched unaffiliated mutual funds.

Keywords: mutual funds, hedge funds, side-by-side arrangements, institutional investors

JEL Classification: G1, G2

Suggested Citation

Cici, Gjergji and Gibson, Scott and Moussawi, Rabih, For Better or Worse? Mutual Funds in Side-By-Side Management Relationships With Hedge Funds (December 14, 2006). Available at SSRN: https://ssrn.com/abstract=905600 or http://dx.doi.org/10.2139/ssrn.905600

Gjergji Cici (Contact Author)

College of William and Mary - Mason School of Business ( email )

P.O. Box 8795
Williamsburg, VA 23187-8795
United States
757-221-1826 (Phone)

George Scott Gibson

College of William and Mary - Mason School of Business ( email )

P.O. Box 8795
Williamsburg, VA 23187-8795
United States
757/221-1673 (Phone)

Rabih Moussawi

Villanova University - Department of Finance ( email )

800 E Lancaster Ave
Bartley Hall, 1003
Villanova, PA 19085
United States

University of Pennsylvania - The Wharton School ( email )

United States

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