Hedge fund franchises

• Main Authors: FUNG, William, HSIEH, David, NAIK, Narayan, TEO, Melvyn
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2021
• Subjects: hedge funds; franchises; multiple product firms; agency problems; spillovers; Finance and Financial Management; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/5964; https://ink.library.smu.edu.sg/context/lkcsb_research/article/6963/viewcontent/HedgeFundFranchises_mnsc_pv_oa.pdf
• Institution: Singapore Management University

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.