Hedge Fund Innovation

We study first-mover advantages in the hedge fund industry by clustering
hedge funds based on the type of assets and instruments they trade in,
sector and investment focus, and fund details. We find that early entry in
a cluster is associated with higher excess returns, longer survival, higher
incentive fees and lower management fees compared to funds that arrive
later. Moreover, the latest entrants have a high loading on the returns of
the innovators, but with lower incentive fees, and higher management fees.
Cross-sectional regressions show that the out-performance of innovating
funds are declining with age. The results are robust to different parameters
of clustering and backfill-bias, and are not driven by the possible
existence of flagship and follow-on funds. Our results show that the reported
characteristics of hedge funds can be used to infer strategy-related
information and suggest that specific first-mover advantages exist in the
hedge fund industry.