Three Essays on Hedge Funds

This dissertation consists of three chapters. The first two chapters focus on the Chinese hedge fund industry, and the third chapter focuses on American and offshore hedge funds. In the first chapter, I study the Chinese hedge fund industry during its earliest development from 2003 to 2013. I find that it outperforms the Chinese stock market over this period by about 200% in cumulative returns. I also find that different investment strategies lead to significant differences in a fund’s performance, risk taking behavior, and return generating process, although no investment strategy demonstrates persistence in performance during this period. Moreover, I point out that for any research on survival issues of Chinese hedge funds, it is necessary to distinguish between dissolved funds according to why a fund stops reporting to a database. Chinese hedge funds are different from other hedge funds in the world because of their self-chosen disclosing mechanism, special legal structure, and constant policy changes. So in the second chapter, I investigate whether these special features affect the performance of Chinese hedge funds. I find strong evidence that better fund performance is associated with more frequent fund disclosure, higher complexity of trust companies and fund management companies, and slower speed of fund families in launching new funds. I also provide evidence that the new policy in July 2011, which allows trust companies to trade stock index futures, brings fundamental changes to the hedge fund industry, especially funds that focus on hedging techniques. The third chapter studies hedge funds and their service providers. By building a comprehensive numeric score of hedge funds’ service providers, I study the relationship between hedge funds’ use of service providers and funds’ characteristics, performances, and investor flows. I find that using well-known service providers is associated with larger fund size, younger fund age, offshore domiciliation, better past performance, and smaller and less volatile cash flows from investors, and it can also predict better fund performance in the future. My results are robust across different fund sizes, investment strategies, and different levels of asset growth