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

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  • 1. Side-by-Side Management of Hedge Funds and Mutual Funds Discussed by Clemens Sialm March 14, 2007
  • 2. Side-by-Side Management <ul><li>Fund companies and managers that simultaneously control mutual funds and hedge funds have an incentive for strategic cross-subsidization between the different investment portfolios. </li></ul><ul><li>These two papers study whether side-by-side fund companies and managers exhibit different risk-adjusted returns than unaffiliated funds. </li></ul>
  • 3. Different Unit of Observation <ul><li>Cici, Gibson, and Moussawi </li></ul><ul><ul><li>Side-by-side funds are funds that are managed by firms that also simultaneously manage hedge funds. </li></ul></ul><ul><li>Nohel, Wang, and Zheng </li></ul><ul><ul><li>Side-by-side funds are funds that are managed by identified managers that also simultaneously manage hedge funds. </li></ul></ul>
  • 4. Different Results <ul><li>Cici, Gibson, and Moussawi </li></ul><ul><ul><li>Side-by-side mutual funds underperform unaffiliated funds. </li></ul></ul><ul><li>Nohel, Wang, and Zheng </li></ul><ul><ul><li>Side-by-side mutual funds outperform unaffiliated funds. </li></ul></ul><ul><ul><li>Side-by-side hedge funds underperform unaffiliated funds. </li></ul></ul>
  • 5. Causes for Performance Differences (1) <ul><li>Strategic Cross-Fund Subsidization </li></ul><ul><ul><li>Mutual funds subsidize hedge funds held by side-by-side fund companies. </li></ul></ul><ul><li>Differences in Investment Ability </li></ul><ul><ul><li>Side-by-side mutual fund managers are more skilled. </li></ul></ul><ul><li>Differences in Investment Strategies </li></ul><ul><ul><li>Side-by-side mutual fund managers follow investment strategies that are more similar to hedge funds (e.g., short-selling, derivatives). </li></ul></ul>
  • 6. Causes for Performance Differences (2) <ul><li>Pure Play vs. Financial Conglomerates </li></ul><ul><ul><li>Companies that focus only on mutual funds might perform better than financial conglomerates. </li></ul></ul><ul><li>Named Fund Manager vs. Anonymous Team </li></ul><ul><ul><li>Fund managers that are willing to disclose their names are less likely to be conflicted. </li></ul></ul><ul><li>Sample Selection Issues </li></ul><ul><ul><li>Hedge funds do not need to register. Successful hedge funds are more likely to voluntarily disclose their returns. </li></ul></ul>
  • 7. Some Quibbles on Cici, Gibson, and Moussawi <ul><li>Timing of the side-by-side relationship is not completely clear. </li></ul><ul><li>Results could be driven by financial conglomerates. </li></ul><ul><li>All portfolios are value-weighted. Are results consistent if equal-weighted? </li></ul><ul><li>Most of the performance difference is driven by holdings return and not by return gap. </li></ul>
  • 8. Some Quibbles on Nohel, Wang, and Zheng <ul><li>Inclusion in the sample might be non-random. </li></ul><ul><ul><li>Only successful hedge funds report their returns. </li></ul></ul><ul><ul><li>Funds with named managers might be less conflicted. </li></ul></ul><ul><li>How reliable is the timing of the side-by-side relationship? </li></ul><ul><li>Endogeneity of side-by-side relationship. </li></ul>
  • 9. Conclusions <ul><li>The question of whether side-by-side management is beneficial or not is of crucial importance for policy makers and investors. </li></ul><ul><li>The two papers give inconclusive results of whether side-by-side management is beneficial or not . </li></ul><ul><li>Additional research is necessary to reconcile the results and to explain why the two teams reach opposing results. </li></ul>

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