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

Author

Listed:
  • 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)

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.

Suggested Citation

  • Yang CAO & Joseph P. OGDEN & Cristian I. TIU, 2012. "Who Benefits From Funds Of Hedge Funds? A Critique Of Alternative Organizational Structures In The Hedge Fund Industry (Ii)," Business Excellence and Management, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 2(1), pages 5-20, March.
  • Handle: RePEc:rom:bemann:v:2:y:2012:i:1:p:5-20
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    References listed on IDEAS

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    1. Stephen J. Brown & William N. Goetzmann & Bing Liang, 2005. "Fees On Fees In Funds Of Funds," World Scientific Book Chapters,in: The World Of Hedge Funds Characteristics and Analysis, chapter 7, pages 141-160 World Scientific Publishing Co. Pte. Ltd..
    2. Jonathan B. Berk & Richard C. Green, 2004. "Mutual Fund Flows and Performance in Rational Markets," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1269-1295, December.
    3. William Fung & David A. Hsieh & Narayan Y. Naik & Tarun Ramadorai, 2008. "Hedge Funds: Performance, Risk, and Capital Formation," Journal of Finance, American Finance Association, vol. 63(4), pages 1777-1803, August.
    4. Teo, Melvyn, 2011. "The liquidity risk of liquid hedge funds," Journal of Financial Economics, Elsevier, vol. 100(1), pages 24-44, April.
    5. 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.
    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. 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.
    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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    More about this item

    Keywords

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

    JEL classification:

    • M20 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - General
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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