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The Economics of Hedge Fund Startups: Theory and Empirical Evidence
Author(s) -
CAO CHARLES,
FARNSWORTH GRANT,
ZHANG HONG
Publication year - 2021
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.13009
Subject(s) - hedge fund , incentive , stylized fact , empirical evidence , alternative beta , business , hedge accounting , economics , institutional investor , financial economics , finance , global assets under management , open end fund , microeconomics , corporate governance , macroeconomics , philosophy , epistemology
This paper examines how market frictions influence the managerial incentives and organizational structure of new hedge funds. We develop a stylized model in which new managers search for accredited investors and have stronger incentives to acquire managerial skill when encountering low investor demand. Fund families endogenously arise to mitigate frictions and weaken the performance incentives of affiliated new funds. Empirically, based on a TASS‐HFR‐BarclayHedge merged database, we find that ex ante identified cold inceptions facing low investor demand outperform existing hedge funds and hot inceptions facing high demand and that cold stand‐alone inceptions outperform all types of family‐affiliated inceptions.