Birds of a Feather, Do Hedge Fund Managers Flock Together?

The spectacular growth of the hedge fund industry in recent decades has stimulated a great interest in understanding the roots of this success. In the academic literature, this question has been tackled mainly by developing increasingly rich factor models.

Alberto Plazzi, Assistant professor with tenure track at the Faculty of Economics at the Università della Svizzera italiana (USI) and researcher at the Swiss Finance Institute (SFI) in Lugano, has addressed the issue with a new approach. Together with colleagues Marc Gerritzen (Berenberg Bank) and Jens Jackwerth (Constance University), Plazzi has analysed data provided by the Financial Conduct Authority (the financial regulator in the UK), in particular current and past employment of key employees at hedge fund firms in the UK, as well as their social ties in the form of prior employment experience.

The study, entitled Birds of a Feather - Do Hedge Funds Flock Together?, reveals how fund managers who share a common experience in an industry are likely to have been exposed to similar training and to have established a network of personal connections. These characteristics tend to be ‘mobile’ and to manifest themselves later, when setting up their firms. According to the authors, the social ties between the hedge fund managers explain a significant part of their success, and therefore should be taken into account during the evaluation processes of hedge fund performances.

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