Hedge Fund Franchises | Zendy

William Fung | Zendy; David A. Hsieh | Zendy; Narayan Y. Naik | Zendy; Melvyn Teo | Zendy

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Hedge Fund Franchises

Author(s) -

William Fung,

David A. Hsieh,

Narayan Y. Naik,

Melvyn Teo

Publication year - 2020

Publication title -

management science

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 4.954

H-Index - 255

eISSN - 1526-5501

pISSN - 0025-1909

DOI - 10.1287/mnsc.2019.3516

Subject(s) - hedge fund , fund of funds , business , alternative beta , finance , global assets under management , spillover effect , incentive , performance fee , revenue , open end fund , product (mathematics) , agency (philosophy) , institutional investor , fund administration , economics , microeconomics , corporate governance , market liquidity , philosophy , geometry , mathematics , epistemology

We investigate the growth strategies of hedge fund firms. We find that firms with successful first funds are able to launch follow-on funds that charge higher performance fees, set more onerous redemption terms, and attract greater inflows. Motivated by the aforementioned spillover effects, first funds outperform follow-on funds, after adjusting for risk. Consistent with the agency view, greater incentive alignment moderates the performance differential between first and follow-on funds. Moreover, multiple-product firms underperform single-product firms but harvest greater fee revenues, thereby hurting investors while benefitting firm partners. Investors respond to this growth strategy by redeeming from first funds of firms with follow-on funds that do poorly. Empirically, the multiple-product firm has become the dominant business model for the hedge fund industry.

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