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To list or not to list? Manager IPOs shown to hurt hedge fund returns

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Hedge funds run by listed companies underperform those run by privately owned firms, according to academic research.

Listed firms gained $3.5m (€3.3m) more in revenue than privately owned companies and gained more assets under management (AUM), despite their underperformance, reported Lin Sun and Melvyn Teo of Singapore Management University’s Lee Kong Chian School of Business.

In the five years after a group’s initial public offering (IPO), risk-adjusted performance of funds fell by 13.7% a year on average, the researchers wrote in their paper, ‘The Pitfalls of Going Public: New Evidence from Hedge Funds’.

Listed-manager funds underperformed their unlisted peers by 2.9% a year.

The pair analysed more than 16,000 existing and defunct hedge funds, taking performance and asset data between January 1994 and December 2013.

Over the period, listed companies increased their market share from 4% of total assets to more than 16%, Sun and Teo’s data illustrated.

Sun and Teo said: “We show that hedge funds managed by listed asset management firms consistently underperform funds managed by their unlisted competitors. The results are driven by agency problems at fund management companies.”

Newly listed firms tend to “aggressively raise capital” through new product launches, the authors wrote.

The best funds for raising capital – typically those with high liquidity – were also those most likely to underperform relative to similar products run by unlisted companies.

Sun and Teo argued that investors in funds run by listed companies were trading performance for “the comfort of lower operational risk”.

“Typically, a privately held hedge fund firm is controlled by its founders … who also invest a substantial percentage of their net worth in the funds managed by the firm – hence the tight link between ownership, control and investment capital,” they added.

“Post-IPO, this link is broken as the founders of the firm sell out to new shareholders who neither invest alongside the limited partners nor manage the hedge funds run by the firm.”

Read Sun and Teo’s paper here.

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