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Who Benefits From Funds Of Hedge Funds? A Critique Of Alternative Organizational Structures In The Hedge Fund Industry (I)

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Author Info

  • Yang CAO

    ()
    (University at Buffalo, Buffalo, New York 14260, USA)

  • Joseph P. OGDEN

    ()
    (University at Buffalo, Buffalo, New York 14260, USA)

  • Cristian I. TIU

    ()
    (University at Buffalo, Buffalo, New York 14260, USA)

Registered author(s):

    Abstract

    This paper provides a critique of alternative organizational structures in the hedge fund industry. Our critique is facilitated by several stylized models describing alternative industry structures. The models include: (1) An insideonly hedge fund model; (2) A straddling hedge fund model; (3) A straddling “feeder” fund of funds (FOF) hedge fund model; (4) A stand-alone outside hedge fund; and (5) An outside “feeder” FOF hedge fund model. Our discussion of these models, which centers on benefits vs. fundamental problems related to illiquidity, information asymmetry, and conflicts of interest, leads to several hypotheses about the differential characteristics and return performance of both individual hedge funds and FOFs.

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    Bibliographic Info

    Article provided by Faculty of Management, Academy of Economic Studies, Bucharest, Romania in its journal Business Excellence and Management.

    Volume (Year): 1 (2011)
    Issue (Month): 1 (December)
    Pages: 19-36

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    Handle: RePEc:rom:bemann:v:1:y:2011:i:1:p:19-36

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    Related research

    Keywords: Hedge funds; Funds of funds; Illiquidity; Information asymmetry; Conflicts of interest; Adjacency risk; Contagion; Return performance;

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    1. Nicolas P.B. Bollen & Veronika K. Pool, 2009. "Do Hedge Fund Managers Misreport Returns? Evidence from the Pooled Distribution," Journal of Finance, American Finance Association, vol. 64(5), pages 2257-2288, October.
    2. Stulz, Rene M., 2007. "Hedge Funds: Past, Present, and Future," Working Paper Series 2007-3, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    3. Mila Getmansky & Andrew W. Lo & Igor Makarov, 2003. "An Econometric Model of Serial Correlation and Illiquidity in Hedge Fund Returns," NBER Working Papers 9571, National Bureau of Economic Research, Inc.
    4. Fung, William & Hsieh, David A., 1999. "A primer on hedge funds," Journal of Empirical Finance, Elsevier, vol. 6(3), pages 309-331, September.
    5. Lerner, Joshua & Schoar, Antoinette, 2003. "The Illiquidity Puzzle: Theory and Evidence from Private Equity," Working papers 4378-02, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    6. Kahl, Matthias & Liu, Jun & Longstaff, Francis A., 2003. "Paper millionaires: how valuable is stock to a stockholder who is restricted from selling it?," Journal of Financial Economics, Elsevier, vol. 67(3), pages 385-410, March.
    7. Ben-David, Itzhak & Franzoni, Francesco & Moussawi, Rabih, 2010. "The Behavior of Hedge Funds during Liquidity Crises," Working Paper Series 2010-2, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    8. David J. Brophy & Paige P. Ouimet & Clemens Sialm, 2009. "Hedge Funds as Investors of Last Resort?," Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 541-574, February.
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    12. Andrew Ang & Matthew Rhodes-Kropf & Rui Zhao, 2008. "Do Funds-of-Funds Deserve Their Fees-on-Fees?," NBER Working Papers 13944, National Bureau of Economic Research, Inc.
    13. Fung, William & Hsieh, David A & Naik, Narayan & Ramadorai, Tarun, 2006. "Hedge Funds: Performance, Risk and Capital Formation," CEPR Discussion Papers 5565, C.E.P.R. Discussion Papers.
    14. Stephen Brown & William Goetzmann & Bing Liang & Christopher Schwarz, 2008. "Mandatory Disclosure and Operational Risk: Evidence from Hedge Fund Registration," Journal of Finance, American Finance Association, vol. 63(6), pages 2785-2815, December.
    15. Longstaff, Francis A, 2001. "Optimal Portfolio Choice and the Valuation of Illiquid Securities," Review of Financial Studies, Society for Financial Studies, vol. 14(2), pages 407-31.
    16. Liang, Bing, 2000. "Hedge Funds: The Living and the Dead," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(03), pages 309-326, September.
    17. Fung, William & Hsieh, David A, 1997. "Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 275-302.
    18. Agarwal, Vikas & Kale, Jayant R., 2007. "On the relative performance of multi-strategy and funds of hedge funds," CFR Working Papers 07-11, University of Cologne, Centre for Financial Research (CFR).
    19. Titman, Sheridan, 2010. "The leverage of hedge funds," Finance Research Letters, Elsevier, vol. 7(1), pages 2-7, March.
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