RFS Advance Access originally published online on February 10, 2009
Review of Financial Studies 2009 22(9):3531-3561; doi:10.1093/rfs/hhp007
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The Geography of Hedge Funds
Singapore Management University
Send correspondence to Melvyn Teo, Singapore Management University, Lee Kong Chian School of Business, 50 Stamford Road, #04-01, Singapore 178899; telephone: +65-6828-0735; fax: +65-6828-0777. E-mail: melvynteo{at}smu.edu.sg.
JEL Classification: G11, G12, G23
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Abstract |
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This article analyzes the relationship between the risk-adjusted performance of hedge funds and their proximity to investments using data on Asia-focused hedge funds. I find, relative to an augmented Fung and Hsieh (2004) factor model, that hedge funds with a physical presence (head or research office) in their investment region outperform other hedge funds by 3.72% per year. The local information advantage is pervasive across all major geographical regions, but is strongest for emerging market funds and funds holding illiquid securities. These results are robust to adjustments for fund fees, serial correlation, backfill bias, and incubation bias. I show also that distant funds, especially those based in the United States and the United Kingdom, are able to raise more capital, charge higher fees, and set longer redemption periods, despite their underperformance relative to nearby funds. It appears that distant funds trade investment performance for better access to capital.
I thank the editor, Tobias Moskowitz, and an anonymous referee for very helpful comments. I am also indebted to Vikas Agarwal, George Aragon, Guillermo Baquero, Wayne Ferson, Bill Fung, Will Goetzmann, Mila Getmansky, Robert Kosowski, Bing Liang, Narayan Naik, Loriana Pelizzon, and seminar participants at the 2007 Western Finance Association Meetings and the 2007 European Finance Association Meetings for suggestions and discussions. The research assistance of Chuin-Hao Lim and the financial support from the BNP Paribas Hedge Fund Centre at SMU are gratefully acknowledged. This research is inspired by suggestions from Bill Fung.