Hedge fund franchises

Journal Article (Journal Article)

We investigate the growth strategies of hedge fund firms. We find that firms with successful first funds are able to launch follow-on funds that charge higher performance fees, set more onerous redemption terms, and attract greater inflows. Motivated by the aforementioned spillover effects, first funds outperform follow-on funds, after adjusting for risk. Consistent with the agency view, greater incentive alignment moderates the performance differential between first and follow-on funds. Moreover, multiple-product firms underperform single-product firms but harvest greater fee revenues, thereby hurting investors while benefitting firm partners. Investors respond to this growth strategy by redeeming from first funds of firms with follow-on funds that do poorly. Empirically, the multiple-product firm has become the dominant business model for the hedge fund industry.

Full Text

Duke Authors

Cited Authors

  • Fung, W; Hsieh, D; Naik, N; Teo, M

Published Date

  • February 1, 2021

Published In

Volume / Issue

  • 67 / 2

Start / End Page

  • 1199 - 1226

Electronic International Standard Serial Number (EISSN)

  • 1526-5501

International Standard Serial Number (ISSN)

  • 0025-1909

Digital Object Identifier (DOI)

  • 10.1287/mnsc.2019.3516

Citation Source

  • Scopus