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Under one roof: A study of simultaneously managed hedge funds and funds of hedge funds

Listed author(s):
  • Agarwal, Vikas
  • Lu, Yan
  • Ray, Sugata

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 fund firms can simultaneously offer a hedge fund. We find that while superior past performance and larger size drive the decision to become simultaneous for hedge fund firms, past flows drive the decision for funds of hedge fund 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 fund 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.

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Paper provided by University of Cologne, Centre for Financial Research (CFR) in its series CFR Working Papers with number 14-13.

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Date of creation: 2014
Handle: RePEc:zbw:cfrwps:1413
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  11. 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.
  12. Tom Nohel & Z. Jay Wang & Lu Zheng, 2010. "Side-by-Side Management of Hedge Funds and Mutual Funds," Review of Financial Studies, Society for Financial Studies, vol. 23(6), pages 2342-2373, June.
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  14. Prachi Deuskar, 2011. "The Good or the Bad? Which Mutual Fund Managers Join Hedge Funds?," Review of Financial Studies, Society for Financial Studies, vol. 24(9), pages 3008-3024.
  15. Cici, Gjergji & Gibson, Scott & Moussawi, Rabih, 2010. "Mutual fund performance when parent firms simultaneously manage hedge funds," Journal of Financial Intermediation, Elsevier, vol. 19(2), pages 169-187, April.
  16. 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.
  17. Vikram Nanda, 2004. "Family Values and the Star Phenomenon: Strategies of Mutual Fund Families," Review of Financial Studies, Society for Financial Studies, vol. 17(3), pages 667-698.
  18. 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.
  19. Agarwal, Vikas & Boyson, Nicole M. & Naik, Narayan Y., 2009. "Hedge Funds for Retail Investors? An Examination of Hedged Mutual Funds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(02), pages 273-305, April.
  20. Utpal Bhattacharya & Jung H. Lee & Veronika K. Pool, 2013. "Conflicting Family Values in Mutual Fund Families," Journal of Finance, American Finance Association, vol. 68(1), pages 173-200, 02.
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  22. Kolokolova, Olga, 2011. "Strategic behavior within families of hedge funds," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1645-1662, July.
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