Onshore and Offshore Hedge Funds: Are They Twins?

42 Pages Posted: 6 Mar 2007 Last revised: 27 Jan 2011

George O. Aragon

Arizona State University (ASU) - Finance Department

Bing Liang

University of Massachusetts Amherst - Department of Finance

Hyuna Park

Brooklyn College - CUNY

Date Written: March 14, 2008

Abstract

Contrary to offshore hedge funds, US-registered (“onshore”) funds are subject to strict marketing prohibitions, accredited investor requirements, limited number of investors, and tax disadvantage. We exploit this difference to test predictions about organizational design, capital flow, and fund performance. We find that onshore funds impose stronger share restrictions such as a lockup provision than offshore funds to deter redemptions, but hold more liquid assets to reduce the cost of liquidity- motivated trading. Our results show that capital flows are less sensitive to past performance in onshore funds than in offshore funds due to regulation on advertising, and the flow sensitivity difference affects performance. Liquidity-adjusted alpha is positive and significant (0.94% per month) only for stand-alone onshore funds that have not been affected by excess capital flows from offshore investors through a master-feeder structure.

Keywords: offshore hedge funds, lock-up provision, liquidity risk, master-feeder structure

JEL Classification: G11, G12, G23, G32

Suggested Citation

Aragon, George O. and Liang, Bing and Park, Hyuna, Onshore and Offshore Hedge Funds: Are They Twins? (March 14, 2008). Available at SSRN: https://ssrn.com/abstract=967788 or http://dx.doi.org/10.2139/ssrn.967788

George O. Aragon

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

Bing Liang (Contact Author)

University of Massachusetts Amherst - Department of Finance ( email )

Amherst, MA 01003
United States

Hyuna Park

Brooklyn College - CUNY ( email )

2900 Bedford Ave
Brooklyn, NY NY 11210
United States

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