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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

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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
    • 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.