SidebySide Management of Hedge Funds and Mutual Funds

1
Side-by-Side Management of Hedge Funds and Mutual
Funds

• Discussed by Clemens Sialm
• March 14, 2007

2
Side-by-Side Management

• Fund companies and managers that simultaneously
  control mutual funds and hedge funds have an
  incentive for strategic cross-subsidization
  between the different investment portfolios.
• These two papers study whether side-by-side fund
  companies and managers exhibit different
  risk-adjusted returns than unaffiliated funds.

3
Different Unit of Observation

• Cici, Gibson, and Moussawi
• Side-by-side funds are funds that are managed by
  firms that also simultaneously manage hedge
  funds.
• Nohel, Wang, and Zheng
• Side-by-side funds are funds that are managed by
  identified managers that also simultaneously
  manage hedge funds.

4
Different Results

• Cici, Gibson, and Moussawi
• Side-by-side mutual funds underperform
  unaffiliated funds.
• Nohel, Wang, and Zheng
• Side-by-side mutual funds outperform unaffiliated
  funds.
• Side-by-side hedge funds underperform
  unaffiliated funds.

5
Causes for Performance Differences (1)

• Strategic Cross-Fund Subsidization
• Mutual funds subsidize hedge funds held by
  side-by-side fund companies.
• Differences in Investment Ability
• Side-by-side mutual fund managers are more
  skilled.
• Differences in Investment Strategies
• Side-by-side mutual fund managers follow
  investment strategies that are more similar to
  hedge funds (e.g., short-selling, derivatives).

6
Causes for Performance Differences (2)

• Pure Play vs. Financial Conglomerates
• Companies that focus only on mutual funds might
  perform better than financial conglomerates.
• Named Fund Manager vs. Anonymous Team
• Fund managers that are willing to disclose their
  names are less likely to be conflicted.
• Sample Selection Issues
• Hedge funds do not need to register. Successful
  hedge funds are more likely to voluntarily
  disclose their returns.

7
Some Quibbles on Cici, Gibson, and Moussawi

• Timing of the side-by-side relationship is not
  completely clear.
• Results could be driven by financial
  conglomerates.
• All portfolios are value-weighted. Are results
  consistent if equal-weighted?
• Most of the performance difference is driven by
  holdings return and not by return gap.

8
Some Quibbles on Nohel, Wang, and Zheng

• Inclusion in the sample might be non-random.
• Only successful hedge funds report their returns.
• Funds with named managers might be less
  conflicted.
• How reliable is the timing of the side-by-side
  relationship?
• Endogeneity of side-by-side relationship.

9
Conclusions

• The question of whether side-by-side management
  is beneficial or not is of crucial importance for
  policy makers and investors.
• The two papers give inconclusive results of
  whether side-by-side management is beneficial or
  not .
• Additional research is necessary to reconcile the
  results and to explain why the two teams reach
  opposing results.