Growing the Asset Management Franchise: Evidence from Hedge Fund Firms

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. While first funds outperform follow-on funds, the superior performance of the former attenuates following the launch of the second fund. Multiple-product firms underperform single-product firms, but harvest greater fee revenues. Consequently, in an environment characterized by rising compliance costs and declining return expectations, the multiple-product firm has become the dominant business model in the hedge fund industry.