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
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: Suggested Citation