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Under One Roof: A Study of Simultaneously Managed Hedge Funds and Funds of Hedge Funds

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  • Vikas Agarwal

    () (J. Mack Robinson College of Business, Georgia State University, Atlanta, Georgia 30303; and Centre for Financial Research, University of Cologne, Albertus-Magnus-Platz, 50923 Cologne, Germany)

  • Yan Lu

    () (College of Business Administration, University of Central Florida, Orlando, Florida 32816)

  • Sugata Ray

    () (Warrington College of Business, University of Florida, Gainesville, Florida 32611)

Abstract

We examine the simultaneous management of hedge funds and funds of hedge funds. Hedge fund firms can choose to simultaneously offer a fund of hedge funds. Similarly, fund of hedge funds firms can simultaneously offer a hedge fund. We find that although superior past performance and larger size drive the decision to become simultaneous for hedge fund firms, past flows drive the decision for fund of hedge funds firms. The effects of simultaneity are also different. When hedge fund firms start funds of hedge funds, we find evidence of value creation, driven by better management of economies of scale and cross learning. In contrast, fund of hedge funds firms starting hedge funds destroy value due to expansion beyond core competencies and agency problems. We find that firms learn about their competencies in the two business lines and discontinue underperforming simultaneity arrangements to focus on the business where they perform better. This paper was accepted by Gustavo Manso, finance .

Suggested Citation

  • Vikas Agarwal & Yan Lu & Sugata Ray, 2016. "Under One Roof: A Study of Simultaneously Managed Hedge Funds and Funds of Hedge Funds," Management Science, INFORMS, vol. 62(3), pages 722-740, March.
  • Handle: RePEc:inm:ormnsc:v:62:y:2016:i:3:p:722-740
    DOI: 10.1287/mnsc.2014.2126
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    File URL: http://dx.doi.org/10.1287/mnsc.2014.2126
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    References listed on IDEAS

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