[We examine situations where the same fund manager simultaneously manages mutual funds and hedge funds. We refer to this as side-by-side management. We document 344 such cases involving 693 mutual funds and 538 hedge funds. Proponents of this practice argue that it is essential to hire and retain star performers. Detractors argue that the temptation for abuse is high, and the practice should be banned. Our analysis based on various performance metrics shows that side-by-side mutual fund managers significantly outperform peer funds, consistent with this privilege being granted primarily to star performers. Interestingly, side-by-side hedge fund managers are at best on par with their style category peers, casting further doubt on the idea that conflicts of interest undermine mutual fund investors. Thus, we find no evidence of welfare loss for mutual fund investors due to exploitation of conflicts of interest.]

We examine the extent to which a fund's cash flows are affected by the stellar performance of other funds in its family–and consequences of such spillovers. We show that star performance results in greater cash inflow to the fund and to other funds in its family. Moreover, families with higher variation in invetment strategies across funds are shown to be more likely to generate star performance. We argue that spillovers may induce lower ability families to pursue star-creating strategies. Consistent with our conjecture, families with high variation in investment strategies across funds significantly underperform low-variation families.

[Does the mutual fund industry lose its best managers to hedge funds? We find that mutual funds are able to retain managers with good performance in the face of competition from a growing hedge fund industry. On the other hand, poor performers are more likely to leave the mutual fund industry. A small fraction of these poor performers find jobs with smaller and younger hedge fund companies, especially when the hedge fund industry is growing rapidly. Analogously, a small fraction of the better-performing mutual fund managers are retained by allowing them to manage a hedge fund side-by-side.]

We examine situations where the same fund manager simultaneously manages mutual funds and hedge funds. We refer to this as side-by-side management. We document 344 such cases involving 693 mutual funds and 538 hedge funds. Proponents of this practice argue that it is essential to hire and retain star performers. Detractors argue that the temptation for abuse is high, and the practice should be banned. Our analysis based on various performance metrics shows that side-by-side mutual fund managers significantly outperform peer funds, consistent with this privilege being granted primarily to star performers. Interestingly, side-by-side hedge fund managers are at best on par with their style category peers, casting further doubt on the idea that conflicts of interest undermine mutual fund investors. Thus, we find no evidence of welfare loss for mutual fund investors due to exploitation of conflicts of interest.

We examine the extent to which a fund's cash flows are affected by the stellar performance of other funds in its family — and consequences of such spillovers. We show that star performance results in greater cash inflow to the fund and to other funds in its family. Moreover, families with higher variation in investment strategies across funds are shown to be more likely to generate star performance. We argue that spillovers may induce lower ability families to pursue star-creating strategies. Consistent with our conjecture, families with high variation in investment strategies across funds significantly underperform low-variation families.

Does the mutual fund industry lose its best managers to hedge funds? We find that mutual funds are able to retain managers with good performance in the face of competition from a growing hedge fund industry. On the other hand, poor performers are more likely to leave the mutual fund industry. A small fraction of these poor performers find jobs with smaller and younger hedge fund companies, especially when the hedge fund industry is growing rapidly. Analogously, a small fraction of the better-performing mutual fund managers are retained by allowing them to manage a hedge fund side-by-side.