Workshop Series: Vikas Agarwal
Using new data on the hedge fund investments of institutional investors, this paper is the first to examine the determinants and consequences of investment preferences including intermediation and early-stage investing associated with institutional investment in the hedge fund industry. Our empirical analysis reveals several findings that are consistent with the predictions from the theoretical literature on intermediation. First, larger investors are more likely to invest directly with hedge funds instead of using intermediated channels, and prefer early-stage investing in emerging funds and spinoffs. Second, institutions investing directly tend to perform better on a risk-adjusted basis. The underperformance of institutions using intermediation is driven mainly by their use of funds of hedge funds while investment consultants do not seem to either benefit or adversely affect the performance. Third, institutions engaging in early-stage investing exhibit better risk-adjusted performance. Taken together, these findings are consistent with an equilibrium where larger institutions enjoy economies of scale in their direct investments and access to emerging managers while smaller institutions rely on costly intermediation, rather than investing directly.
Vikas Agarwal is an Associate Professor of Finance at Georgia State University's J. Mack Robinson College of Business. Vikas received his PhD in finance from the London Business School. He is a Research Fellow at the Centre for Financial Research, University of Cologne, Germany. He also holds a Research Associate position at EDHEC Risk and Asset Management Center, France. His broad areas of research interest include investments and asset pricing. He has done extensive research on various issues related to hedge funds including characterization of their risks, performance evaluation, determinants of money flows and risk-taking behavior, mutual funds mimicking hedge fund strategies, impact of managerial incentives and flexibility on performance, end-of-the-year returns management, self-reporting and delisting biases, portfolio disclosure issues, relative performance of funds of hedge funds and multi-strategy hedge funds, lending by hedge funds to corporations, and higher moment risks in hedge funds. His research has been published both in academic and practitioner journals including Journal of Finance, Review of Financial Studies, Journal of Financial and Quantitative Analysis, Management Science, Journal of Economic Dynamics and Control, Review of Derivatives Research, Journal of Investment Management, Journal of Alternative Investments, Foundations and Trends in Finance, and Journal of Asset Management. His research has been cited and discussed in the financial press and magazines including Euromoney, Financial Times, Forbes, International Herald Tribune, New York Times, and The Wall Street Journal. He is currently serving on the board of the Southeastern Hedge Fund Association.