Hedge Fund Incubation, Development, and Performance

Abstract

An important theme in the history of the hedge fund industry is the disintermediation of the proprietary trading function of investment banks, and as such, the ‘privatization of the trading floor.’ Historically, many hedge funds were set up as independent businesses to pursue trading strategies originally pioneered by proprietary trading desks of large banks. This article presents new empirical information about the causal and associational consequences of some varying forms of institutional affiliation between hedge funds and larger investment organizations or service providers. Three types of relationships between hedge funds and outside organizations are explored and the risk, performance and exposure characteristics of each group are examined. The results show that the institutional commitment associated with seeding and operational support is positively correlated with risk-adjusted returns relative to the broader universe of hedge funds.