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Institutional investment and intermediation in the hedge fund industry

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  • Agarwal, Vikas
  • Nada, Vikram
  • Ray, Sugata

Abstract

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.

Suggested Citation

  • Agarwal, Vikas & Nada, Vikram & Ray, Sugata, 2013. "Institutional investment and intermediation in the hedge fund industry," CFR Working Papers 13-03, University of Cologne, Centre for Financial Research (CFR).
  • Handle: RePEc:zbw:cfrwps:1303
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    Cited by:

    1. Andonov, Aleksandar & Eichholtz, Piet & Kok, Nils, 2015. "Intermediated investment management in private markets: Evidence from pension fund investments in real estate," Journal of Financial Markets, Elsevier, vol. 22(C), pages 73-103.
    2. Denitsa Stefanova & Arjen Siegmann & Marcin Zamojski, 2014. "Hedge Fund Innovation," LSF Research Working Paper Series 14-13, Luxembourg School of Finance, University of Luxembourg.

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