Institutional investment and intermediation in the hedge fund industry
Using new data on the hedge fund investments of institutional investors, this paper is the first to examine the determinants and consequences of intermediation in the hedge fund industry. Our empirical analysis reveals several findings consistent with predictions from the theoretical literature. First, larger investors are more likely to invest directly with hedge funds instead of using intermediated channels. Second, institutions investing directly tend to outperform their intermediary-using counterparts. The inferior performance of institutions using intermediaries reflects: (i) worse performance on their few direct hedge fund investments and (ii) their larger allocation to funds of hedge funds that are known to perform worse than direct hedge fund investments. Taken together, these findings suggest an equilibrium in which larger institutions enjoy economies of scale, enabling direct investment into relatively better performing hedge funds. As institutional size and the number of hedge fund investments increase, the returns from direct investment do exhibit a decline, suggesting eventual scale diseconomies.
|Date of creation:||2013|
|Contact details of provider:|| Postal: 0221 / 470 5607|
Phone: 0221 / 470 5607
Fax: 0221 / 470 5179
Web page: http://cfr-cologne.de/english/version06/html/home.php
More information through EDIRC
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.:
- Stephen J. Brown & William N. Goetzmann & Bing Liang, 2003.
"Fees on Fees in Funds of Funds,"
NBER Working Papers
9464, National Bureau of Economic Research, Inc.
- Stephen J. Brown & William N. Goetzmann & Bing Liang, 2004. "Fees on Fees in Funds of Funds," Yale School of Management Working Papers ysm18, Yale School of Management.
- 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.
- Nanda, Vikram & Narayanan, M. P. & Warther, Vincent A., 2000. "Liquidity, investment ability, and mutual fund structure," Journal of Financial Economics, Elsevier, vol. 57(3), pages 417-443, September.
- Cumming, Douglas & Dai, Na, 2011. "Fund size, limited attention and valuation of venture capital backed firms," Journal of Empirical Finance, Elsevier, vol. 18(1), pages 2-15, January.
- Chen, Xuanjuan & Yao, Tong & Yu, Tong, 2007. "Prudent man or agency problem? On the performance of insurance mutual funds," Journal of Financial Intermediation, Elsevier, vol. 16(2), pages 175-203, April.
- Adam L. Aiken & Christopher P. Clifford & Jesse Ellis, 2013. "Out of the Dark: Hedge Fund Reporting Biases and Commercial Databases," Review of Financial Studies, Society for Financial Studies, vol. 26(1), pages 208-243.
- Bhattacharya, Sudipto & Pfleiderer, Paul, 1985. "Delegated portfolio management," Journal of Economic Theory, Elsevier, vol. 36(1), pages 1-25, June.
- Roman Inderst & Marco Ottaviani, 2009.
"Misselling through Agents,"
American Economic Review,
American Economic Association, vol. 99(3), pages 883-908, June.
- Joseph Chen & Harrison Hong & Wenxi Jiang & Jeffrey D. Kubik, 2013. "Outsourcing Mutual Fund Management: Firm Boundaries, Incentives, and Performance," Journal of Finance, American Finance Association, vol. 68(2), pages 523-558, 04.
- Amit Goyal & Sunil Wahal, 2008. "The Selection and Termination of Investment Management Firms by Plan Sponsors," Journal of Finance, American Finance Association, vol. 63(4), pages 1805-1847, 08.
- JULES H. van BINSBERGEN & MICHAEL W. BRANDT & RALPH S. J. KOIJEN, 2008.
"Optimal Decentralized Investment Management,"
Journal of Finance,
American Finance Association, vol. 63(4), pages 1849-1895, 08.
- Neal M. Stoughton & Youchang Wu & Josef Zechner, 2011. "Intermediated Investment Management," Journal of Finance, American Finance Association, vol. 66(3), pages 947-980, 06.
- Brown, Keith C. & Garlappi, Lorenzo & Tiu, Cristian, 2010. "Asset allocation and portfolio performance: Evidence from university endowment funds," Journal of Financial Markets, Elsevier, vol. 13(2), pages 268-294, May.
- 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.
- Joseph Chen & Harrison Hong & Ming Huang & Jeffrey D. Kubik, 2004. "Does Fund Size Erode Mutual Fund Performance? The Role of Liquidity and Organization," American Economic Review, American Economic Association, vol. 94(5), pages 1276-1302, December.
- Inderst, Roman & Ottaviani, Marco, 2012. "How (not) to pay for advice: A framework for consumer financial protection," Journal of Financial Economics, Elsevier, vol. 105(2), pages 393-411.
- 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).
- Lopez-de-Silanes, Florencio & Phalippou, Ludovic & Gottschalg, Olivier, 2010.
"Giants at the Gate: On the Cross-section of Private Equity Investment Returns,"
28487, University Library of Munich, Germany.
- Florencio Lopez-de-Silanes & Ludovic Phalippou & Oliver Gottschalg, 2011. "Giants at the Gate: On the Cross-Section of Private Equity Investment Returns," Tinbergen Institute Discussion Papers 11-035/2/DSF12, Tinbergen Institute.
- Simon Gervais & Anthony W. Lynch & David K. Musto, 2005. "Fund Families as Delegated Monitors of Money Managers," Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1139-1169.
- Vikas Agarwal & Vyacheslav Fos & Wei Jiang, 2013. "Inferring Reporting-Related Biases in Hedge Fund Databases from Hedge Fund Equity Holdings," Management Science, INFORMS, vol. 59(6), pages 1271-1289, June.
- Daniel Bergstresser & John M. R. Chalmers & Peter Tufano, 2009. "Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry," Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 4129-4156, October.
When requesting a correction, please mention this item's handle: RePEc:zbw:cfrwps:1303. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics)
If references are entirely missing, you can add them using this form.