And enjoy sub-par returns for the next 12 months.
No, this is not FT Alphaville’s marketing department shooting itself in the foot. This is the conclusion of a recent paper examining the effect of advertising on hedge funds’ inflows and returns.
How is there already a paper about this, you might ask, given that the new rules repealing a decades-old restriction on advertising by hedge funds only came into effect this week?
There’s an interesting concept in the marketing world known as surrogate advertising. A company banned from advertising one particular product can still promote its brand by advertising a different product. Liquor companies in India are a classic example. Unable to directly advertise alcohol, they advertise CDs and bottled water instead.
And, for years, big asset managers that comprise both hedge funds and mutual funds have been pulling a similar trick. Unable to advertise the hedge fund portion of their business, they are still able to promote their mutual fund families.
Which means that there is some empirical research into the impact of advertising on hedge fund returns and inflows — albeit tangentially since we can only look at the impact on hedge funds of their parent companies’ mutual fund advertising. You can read the whole study, from Yan Lu, David Musto and Sugata Ray, over here.
The basic conclusion is that hedge funds associated with advertising mutual funds enjoy moderately higher inflows than their non-advertising counterparts. As for those sub-par returns, here’s the relevant bit from the conclusion:
Our results show that hedge funds without affiliated mutual funds are at a disadvantage, and thus would be particularly interested in leveling the playing field by ending the ban [on advertising by hedge funds]. Hedge funds with affiliated funds would lose this advantage but may still gain on net, as the benefit of their ads for their hedge funds would depend less on the success of their mutual funds. Regarding the benefit of hedge-fund ads for investors, we find that ads predict somewhat worse performance; whether this is a net loss to investors is an interesting question for future research.
It’s an imperfect proxy, sure, but perhaps one of the more interesting ones to look at until we can start extrapolating from hedge funds-only advertising. Incidentally, if anyone has seen a hedge fund actually advertise (other than these jokers) please let us know in the comments.
(H/T Nessim Ait Kacimi)