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Market-Based Solutions to Vital Economic Issues
Research
Feb 25, 2021

Finding Fortune: How Do Institutional Investors Pick Asset Managers?

Abstract

We propose and test a framework of private information acquisition and decision timing for asset allocators hiring outside investment managers. Using unique data on due diligence interactions between an institutional allocator and 860 hedge fund managers, we find that the production of private information complements public information. The allocator strategically chooses how much proprietary information to collect, reducing due diligence time by 18 months and improving outcomes. Selected funds outperform unselected funds by 9% over 20 months. The outperformance relates to the allocator learning about fund return-to-scale constraints and manager skill before other investors.

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals.   


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