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

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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)

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    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 inside-only 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. We test as many of these hypotheses as data availability allows, and evidence is consistent with these hypotheses. Regarding characteristics, we predict that some hedge funds and FOFs will have greater leverage and/or more restrictive withdrawal policies than others, and evidence is consistent with these predictions. Regarding return performance, we predict that certain hedge funds, and FOFs in general, will have relatively poor return performance, and evidence is consistent.

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    File URL: http://beman.ase.ro/no21/1.pdf
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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): 2 (2012)
    Issue (Month): 1 (March)
    Pages: 5-20

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    Handle: RePEc:rom:bemann:v:2:y:2012:i:1:p:5-20

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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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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Stephen Brown & William Goetzmann & Bing Liang, 2002. "Fees on Fees in Funds of Funds," Yale School of Management Working Papers ysm309, Yale School of Management, revised 01 Sep 2009.
    2. Aggarwal, Rajesh K. & Jorion, Philippe, 2010. "The performance of emerging hedge funds and managers," Journal of Financial Economics, Elsevier, vol. 96(2), pages 238-256, May.
    3. Sheridan Titman & Cristian Tiu, 2011. "Do the Best Hedge Funds Hedge?," Review of Financial Studies, Society for Financial Studies, vol. 24(1), pages 123-168.
    4. Teo, Melvyn, 2011. "The liquidity risk of liquid hedge funds," Journal of Financial Economics, Elsevier, vol. 100(1), pages 24-44, April.
    5. Jonathan B. Berk & Richard C. Green, 2002. "Mutual Fund Flows and Performance in Rational Markets," FAME Research Paper Series rp100, International Center for Financial Asset Management and Engineering.
    6. Aragon, George O., 2007. "Share restrictions and asset pricing: Evidence from the hedge fund industry," Journal of Financial Economics, Elsevier, vol. 83(1), pages 33-58, January.
    7. 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.
    8. Agarwal, Vikas & Fos, Vyacheslav & Jiang, Wei, 2010. "Inferring reporting biases in hedge fund databases from hedge fund equity holdings," CFR Working Papers 10-08, University of Cologne, Centre for Financial Research (CFR).
    9. 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).
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