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

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Side-by-Side Management of Hedge Funds and Mutual Funds Discussed by Clemens Sialm March 14, 2007 Side-by-Side Management Fund companies and managers that ... – PowerPoint PPT presentation

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Title: Side-by-Side 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.
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