On hedge fund inceptions in a competitive market

Abstract

This paper examines hedge fund inceptions in a competitive market. Using the recursive demeaning estimation method, we find hedge fund inceptions are positively related to market competition and market condition, but negatively related to investor sentiment and style performance. This implies hedge fund managers actively seek arbitrage and inception opportunities, when market conditions are recovering with competition heated up. We also find new hedge funds tend to open in a less popular investment area when investor sentiment is lower and/or it has greater potential to grow in the future. Furthermore, funds, launched in a more competitive market when market condition is poorer, tend to perform better in the subsequent months, with multi-strategies hedge funds showing strong results. Important determinants include minimum investment value, initial fund size and redemption fee. Our findings support private investors when selecting new hedge funds for investment.