The Start Matters: Time-Varying Investor Demand, Hedge Fund Inceptions and Performance

Review of Finance, forthcoming

60 Pages Posted: 24 Aug 2018 Last revised: 13 Sep 2023

See all articles by Lin Sun

Lin Sun

George Mason University - Department of Finance

Zheng Sun

University of California, Irvine - Paul Merage School of Business

Lu Zheng

University of California, Irvine - Paul Merage School of Business

Date Written: August 23, 2023

Abstract

We examine whether time-varying investor demand affects hedge fund companies’ decision to start new funds. We find significantly more fund inceptions in hot markets than in cold markets. Funds opened in hot markets exhibit weaker long-term performance, shorter survival time and greater fraud risk. Investor clientele also varies with market conditions. Investors in hot markets appear to be less sophisticated, which may provide opportunities for more low-quality funds to enter the industry. Overall, inceptions due to high investor demand are not in the best interest of investors.

Keywords: Hedge fund, investor demand, inception, performance, money flow, delegated portfolio management

JEL Classification: G10, G11, G20, G41, G51

Suggested Citation

Sun, Lin and Sun, Zheng and Zheng, Lu, The Start Matters: Time-Varying Investor Demand, Hedge Fund Inceptions and Performance (August 23, 2023). Review of Finance, forthcoming, Available at SSRN: https://ssrn.com/abstract=3231259 or http://dx.doi.org/10.2139/ssrn.3231259

Lin Sun (Contact Author)

George Mason University - Department of Finance ( email )

Fairfax, VA 22030
United States

Zheng Sun

University of California, Irvine - Paul Merage School of Business ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States

Lu Zheng

University of California, Irvine - Paul Merage School of Business ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States
9498248365 (Phone)

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