The value of funds of hedge funds: Evidence from their holdings

Adam L. Aiken, Christopher P. Clifford, Jesse Ellis

Research output: Contribution to journalArticlepeer-review

12 Scopus citations

Abstract

We examine the portfolio holdings of funds of hedge funds (FoFs) to identify the channels through which FoFs add value for their clients. FoFs offer access to a diversified portfolio of funds that would be costly for constrained investors to manage on their own. Although we find only limited evidence that FoFs exhibit skill when selecting hedge funds, we find strong evidence that FoFs make skillful termination decisions. After FoFs divest from a hedge fund, those hedge funds subsequently underperform and fail more often. Our evidence indicates that FoFs learn and skillfully process information about their portfolio funds after they become investors, enabling them to forecast poor future performance. Our study suggests that FoFs serve an important role as intermediaries in a market characterized by significant frictions and transactions costs.

Original languageEnglish
Pages (from-to)2415-2429
Number of pages15
JournalManagement Science
Volume61
Issue number10
DOIs
StatePublished - Oct 1 2015

Bibliographical note

Publisher Copyright:
© 2015 INFORMS.

Keywords

  • Finance
  • Financial institutions
  • Investment
  • Markets

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research

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