Raj Gupta

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Coddled Managers Hedge Funds Incubation,
Development and Performance

• Raj Gupta
• Research Director
• CISDM

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Background

• Hedge fund development stems from 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.
• Many hedge managers have chosen to set themselves
  up with significant and direct relationships to
  larger providers of capital and infrastructure,
  such as investment banks, fund of funds or other
  multistrategy allocators, service providers, or
  other hedge funds themselves .

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Background

• Little published research exists on the nature
  and consequences of these organizational and
  institutional relationships.
• This paper presents new empirical information
  about the causal and associational consequences
  of varying some forms of institutional
  affiliation between hedge funds and larger
  investment organizations or service providers.

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Data Samples

• Sample I contains funds that are seeded but
  receive no operational support from the seeding
  institution.
• Sample II contains funds that receive both
  seeding and operational support from the seeding
  institution.
• Sample III contains funds that receive
  operational support but no seed capital.

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Economies of Scale in Operations

• Technology The technological infrastructure,
  including computers, software, data feeds, etc.
• Compliance The review, reporting and control of
  trades and relationships with other institutions
  or individuals.
• Risk Management The evaluation of the riskiness
  of securities, derivatives, and counterparties.
• Administration The monitoring of portfolios,
  including their valuation, as well as handling of
  money transfers between a hedge fund and its
  investors.

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ANOVA Analysis
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Previous Research

• While there is little existing research that
  examines empirically the characteristics and
  consequences of institutional relationships,
  there is a wide literature of prescriptive nature
  that addresses operational and organizational
  issues investors should be concerned with when
  evaluating hedge funds.
• Capco (2003) identifies, with some subjectivity,
  the operational and other causes of hedge fund
  failure.

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Previous Research

• Meziani 2007 examine ten operational risks that
  investors should know about. These include
• Concentration of Strategy
• Inexperienced or Untested Staff
• Unclear Overall Business Viability
• Service Provider Track-Record
• Haphazard Risk Management
• No Written Valuation Procedures
• Inappropriate Leverage and Liquidity
• Governance Practices
• Technology Infrastructure
• Non-comprehensive Business Continuity Plan

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Recent Failures
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Results
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Results
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Results
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Results
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Results
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Results
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Results
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Results
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Results