Research suggests that portfolio managers who have left hedge funds to start their own firms continue to benefit from those old ties.
Hedge fund “families” — think Julian Robertson’s Tiger Management and its assorted Tiger Cubs — likely share information or ideas among themselves, according to the study by two finance professors at the University of Hawaii at Manoa. Nimesh Patel and Harold Spilker documented overlapping trades by hedge funds with shared origins, and found that a portfolio of these coordinated positions resulted in excess returns.
“This is surprising given the lack of formal connections between independent hedge funds,” Patel and Spilker wrote. “Why would fund managers, each running legally independent funds and competing for flows, share investment information or ideas?”
For one, most hedge fund managers lack the capital to push market prices up or down by themselves, the authors suggested. Managers also may share information to elicit feedback or find out what others know, as previous studies have concluded.
Whatever the motivation, Patel and Spilker found that information sharing among hedge fund families “manifests as family block trades that predict stock level alphas.” Specifically, a long-short portfolio made up of coordinated family trades was found to have an annualized alpha of 7.32 percent.
To identify hedge fund families, Patel and Spilker used a dataset from Novus Partners that connects firms based on managers’ past employment history. David Stemerman’s Conatus Capital, for example, is a child fund of Steve Mandel’s Lone Pine Capital — in turn an offspring of Tiger Management.
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They then analyzed “unanimous” trades made by hedge fund family members — for example, when two or more family members bought a stock that none held previously, or when each family member holding a particular stock exits that position entirely.
“The risk-adjusted returns are realized over the first two months after portfolio formation and do not fully reverse,” the authors wrote. “This suggests hedge fund family trades may contain information on fundamentals rather than short-term price pressure.”
Patel and Spilker added that this information is “likely not tradeable for other market participants,” because the returns are realized before the publication of 13F regulatory filings that report hedge fund stock positions.
“The returns are larger for high information asymmetry stocks and suggest that hedge fund families coordinate on information, despite having no shared legal structure like mutual fund families,” the authors concluded.