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The Economics of Hedge Fund Startups: Theory and Empirical Evidence

Journal of Finance, ISSN: 1540-6261, Vol: 76, Issue: 3, Page: 1427-1469
2021
  • 11
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  • 141
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  • 62
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Article Description

This paper examines how market frictions influence the managerial incentives and organizational structure of new hedge funds. We develop a stylized model in which new managers search for accredited investors and have stronger incentives to acquire managerial skill when encountering low investor demand. Fund families endogenously arise to mitigate frictions and weaken the performance incentives of affiliated new funds. Empirically, based on a TASS-HFR-BarclayHedge merged database, we find that ex ante identified cold inceptions facing low investor demand outperform existing hedge funds and hot inceptions facing high demand and that cold stand-alone inceptions outperform all types of family-affiliated inceptions.

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