dummy at the family levelk(t-1) + β24open to non-accredited investors dummy of category j in familykj(t-1) + β25average family lockup period in months at the family levelk(t-1) + β26average family lockup period in months of category j in familykj(t-1) (6) This regression includes time trend variables. The control variables are measured at both the family level and the style category level (within each fund family). In Figure 5, the coefficient on related is significantly positive in all specifications, indicating that a family’s market share is higher for style category(ies) within a family in the manager’s core competency. Earlier Figure 3 results indicate that these same core competency style categories have the best-performing funds. Since both market share and performance increase when managers focus on their core competencies, both managerial and investor incentives can be achieved. Figure 5 also finds a significant positive relationship between market share in a style category and the number of funds in that category, also implying that focusing on core competency funds increases market share. Finally, the more experience a manager has in a particular category, the more assets the manager attracts to that category6. Our results are generally consistent with Khorana and Servaes (2007).
Conclusion We examine the relationship between hedge fund family membership, performance, and market share. Unconditionally, families with more funds underperform families with less funds. However, regardless of size, families that focus on their core competencies have good ‘core competency’ funds but poor ‘fringe’ funds (funds outside of their core competencies). In other words, managers that do not venture outside their skill sets outperform. We also investigate the determinants of family market share. Families with more diversity in their fund offerings have higher market share. Families with good past performance also have higher market share. Hence, fund managers must strike a balance between improving market share and maintaining good performance. One way that managers can achieve this goal is to focus on their core competencies, since we show that for these funds, both performance and market share is strong. Hence, managers would do well to stick to their core competencies when opening new funds. Our results suggest the following. First, hedge fund investors should not unconditionally avoid multi-fund families. Rather, they should select funds from families in which the majority of the family’s funds are core competency funds. Second, regardless of family size, hedge fund investors should avoid funds outside the family’s core competencies. Finally, hedge fund managers should grow their families by focusing on new funds within their core competencies, since these funds attract the largest market share and are the best performers.
6 As with prior results, we reperform our tests excluding one-fund families and find consistent results.
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