RT Journal Article
SR Electronic
T1 Risk-Taking and Managerial Incentives: <em>Seasoned versus New Funds of Funds</em>
JF The Journal of Alternative Investments
FD Institutional Investor Journals
SP 100
OP 108
DO 10.3905/JAI.2009.11.3.100
VO 11
IS 3
A1 Ying Li
A1 Jamshid Mehran
YR 2008
UL https://pm-research.com/content/11/3/100.abstract
AB While the hedge funds industry has grown rapidly during the past decade, a lack of transparency, a need for professionally conducted due diligence, and the inaccessibility of closed funds to new investors led to a significant growth in funds of funds-i.e., funds that invest in multiple individual hedge funds. This article investigates the performance, managerial incentive, and risk taking behavior for new versus more seasoned funds of funds. The results show no differential in risk-adjusted performance. However, junior funds are shown to have more risk aversion, evidenced by less total risk taking, less systematic risk, and more diversity in investment. The article argues that this is consistent with the "herding" theory in mutual funds proposed by Chevalier and Ellison [1997] as well as the empirical evidence for overconfidence in financial managers by Ben-David, Graham, and Harvey [2006]. After two to three years, the difference in risk taking disappears and the junior funds behave much more like their seasoned counterparts. TOPICS: Real assets/alternative investments/private equity, manager selection, performance measurement