Download This PaperValue Creation in the Hedge Fund Industry
52 Pages Posted: 23 Apr 2025
Date Written: March 05, 2024
Abstract
We develop an approach to jointly study four dimensions of hedge fund value creation-its drivers, split, dynamics, and optimality. This approach captures the large fund heterogeneity and controls for hedge fund complexities. We find that most funds add value via their unique skills but face strong scalability constraints-a feature that prevents them from systematically dominating mutual funds. Hedge fund investors slowly improve their fund capital allocation over time, which suggests an impactful but noisy learning process. Despite these efforts, they extract a modest fraction of the total value. These findings fit reasonably well with an equilibrium model featuring funds with heterogeneous skill and scalability and investors with limited bargaining power.
Keywords: Hedge funds, Hedge fund investors, Value-added, Capital allocation
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