Abstract We examine whether time-varying investor demand affects hedge fund companies’ decision to start new funds. We find significantly more fund inceptions in hot markets than in cold markets. Funds opened in hot markets exhibit weaker long-term performance, shorter survival time, and greater fraud risk. Investor clientele also varies with market conditions. Investors in hot markets appear to be less sophisticated, which may provide opportunities for more low-quality funds to enter the industry. Overall, inceptions due to high investor demand are not in the best interest of investors.

Abstract Hedge funds that endorse the United Nations Principles for Responsible Investment (PRI) underperform other hedge funds after adjusting for risk but attract greater investor flows, accumulate more assets, and harvest greater fee revenues. Consistent with an agency explanation, the underperformance is driven by PRI signatories with low environmental, social, and governance (ESG) exposures and is greater for hedge funds with poor incentive alignment. To address endogeneity, we exploit regulatory reforms that enhance stewardship and show that the ESG exposure and relative performance of signatory funds improve post reforms. Our findings suggest that some hedge funds endorse responsible investment to pander to investor preferences.

Hedge funds managed by listed firms significantly under-perform funds managed by unlisted firms. The under-performance is more severe for funds with low manager deltas, poor governance, and no manager co-investment, or those managed by firms whose prices are sensitive to earnings news. Notwithstanding the under-performance, listed asset management firms raise more capital, by growing existing funds and launching new funds post listing, and harvest greater fee revenues than do comparable unlisted firms. The results are consistent with the view that, for asset management firms, going public weakens the alignment between ownership, control, and investment capital, thereby engendering conflicts of interest.

Abstract We propose a theoretically motivated factor model based on investor psychology and assess its ability to explain the cross-section of U.S. equity returns. Our factor model augments the market factor with two factors that capture long- and short-horizon mispricing. The long-horizon factor exploits the information in managers’ decisions to issue or repurchase equity in response to persistent mispricing. The short-horizon earnings surprise factor, which is motivated by investor inattention and evidence of short-horizon underreaction, captures short-horizon anomalies. This 3-factor risk-and-behavioral model outperforms other proposed models in explaining a broad range of return anomalies. (JEL G12, G14) Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.