Costs and Benefits of Financial Conglomerate Affiliation: Evidence from Hedge Funds

This paper explores how affiliation to financial conglomerates affects asset managers’ access to capital, risk taking, and performance. Focusing on a sample of hedge funds, we find that financial conglomerate-affiliated hedge funds (FCAHFs) have lower flow-performance sensitivity than other hedge funds and that this difference is particularly pronounced during financial turmoil. Arguably, thanks to more stable funding, FCAHFs allow their investors to redeem capital more freely and are able to capture price rebounds. Because investors could value these characteristics, our findings provide a rationale for why financial conglomerate affiliation is widespread, although it slightly hampers performance on average.