Incentives Behind Side-by-Side Management of Mutual Funds and Hedge Funds

We examine the incentives that motivate management firms to simultaneously manage mutual funds and hedge funds. By identifying side-by-side management at both the management firm level and the manager level, we find that mutual fund management firms use side-by-side management to retain their talented managers and improve capital flows into their mutual funds. In contrast, hedge fund management firms engage in the side-by-side practice to collect more fees and smooth their compensation over time. The conflict of interest is more likely to exist when hedge fund managers establish mutual funds, and thus investors do not necessarily suffer from side-by-side management.