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Financial Industry Affiliation and Hedge Fund Performance

Author

Listed:
  • Lingling Zheng

    (School of Business, Renmin University of China, Beijing 100872, China)

  • Xuemin (Sterling) Yan

    (College of Business, Lehigh University, Bethlehem, Pennsylvania 18015)

Abstract

Affiliation with a financial conglomerate may provide hedge funds with superior information about the conglomerate’s lending, investment banking, and brokerage clients; such affiliation can also lead to potential conflicts with the other units of the conglomerate and exacerbate the conflict between hedge fund companies and hedge fund investors. We find that affiliated funds significantly underperform unaffiliated funds. A difference-in-difference analysis confirms the negative relation between financial industry affiliation and hedge fund performance. Affiliated funds pursue asset-gathering strategies, overweight their conducted initial public offerings/seasoned equity offerings clients’ stocks, are more likely to commit legal and regulatory violations, and tend to exhibit a greater number of internal conflicts. Our results are consistent with conflict of interest exerting a negative impact on the performance of affiliated hedge funds. However, it is possible that lack of skill also contributes to the underperformance of affiliated funds.

Suggested Citation

  • Lingling Zheng & Xuemin (Sterling) Yan, 2021. "Financial Industry Affiliation and Hedge Fund Performance," Management Science, INFORMS, vol. 67(12), pages 7844-7865, December.
    • Handle: RePEc:inm:ormnsc:v:67:y:2021:i:12:p:7844-7865
    DOI: 10.1287/mnsc.2020.3864
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    References listed on IDEAS

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