Advisory Firm Paths to Side-By-Side Management and Mutual Fund Performance

39 Pages Posted: 10 Aug 2017 Last revised: 5 Jan 2022

See all articles by John Bae

John Bae

Hongik University; Elon University - Love School of Business

Tim Haight

Loyola Marymount University

Chengdong Yin

Renmin University of China - School of Finance

Date Written: January 4, 2022

Abstract

We examine the performance of mutual funds under side-by-side (SBS) management with hedge funds from a new perspective. Using SEC filings to identify advisory firms engaged in SBS management, we find that mutual fund performance is affected by an advisory firm’s path to SBS management (i.e., whether they started with mutual funds or hedge funds). While no significant path effects are observed when SBS advisers started with mutual funds, we observe significant outperformance when SBS advisers started with hedge funds. However, the performance benefit provided by SBS advisers that started with hedge funds becomes insignificant when SBS management is conducted at the portfolio manager level. Further analysis suggests that these effects relate to the relative contributions of mutual funds and hedge funds to advisers’ total assets and compensation. SBS advisers that started with mutual funds rely heavily on mutual funds for both assets and compensation, which could explain why mutual fund performance does not suffer when these advisers expand into hedge funds. Meanwhile, SBS advisers that started with hedge funds derive more of their assets from mutual funds, though hedge funds generally contribute more to their total compensation. These patterns suggest there are adviser-level incentives to deliver strong mutual fund performance (which attracts capital from new investors) and manager-level incentives to favor hedge funds (which increases compensation).

Keywords: Investment Adviser, Mutual Funds, Side-by-Side Management, Performance, Compensation.

JEL Classification: G20, G23, G29

Suggested Citation

Bae, John and Haight, Tim and Yin, Chengdong, Advisory Firm Paths to Side-By-Side Management and Mutual Fund Performance (January 4, 2022). Available at SSRN: https://ssrn.com/abstract=3015830 or http://dx.doi.org/10.2139/ssrn.3015830

John Bae

Hongik University ( email )

Korea, Republic of (South Korea)

Elon University - Love School of Business ( email )

Elon, NC 27244
United States

Tim Haight

Loyola Marymount University ( email )

7900 Loyola Boulevard
Los Angeles, CA 90045
United States

Chengdong Yin (Contact Author)

Renmin University of China - School of Finance ( email )

Ming De Main Building
Renmin University of China
Beijing, Beijing 100872
China

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