Nicolas A. Papageorgiou, Jerry T. Parwada, and Kian M. Tan analyzed the relationship between hedge fund managers’ performance and the places where they previously worked. Their results are pretty interesting. They found that hedge fund managers who previously worked at mutual funds perform better than hedge fund managers who were previously employed at other hedge funds. This implies that mutual fund managers have to be talented to attract capital whereas hedge fund managers who were employed at other hedge funds raise capital because of their connections, rather than their talent. As you can guess, the number of hedge fund managers who are previously connected to mutual funds is less than the number of hedge fund managers who used to work at other hedge funds. Here is a summary of their findings:
Controlling for a variety of fund characteristics, we find that, while hedge fund experience is neutral in predicting performance, some connections (prime brokerage, custodial and securities broking) are negatively related to performance. Mutual fund experience has a positive impact on investor returns. Prime brokerage and custodian connections reduce the probability of fund liquidation. Finally, being connected is associated with lower lockup periods. The relevance of a broad range of our connectedness variables implies that both sector specific (hedge fund) and industry related experience are relevant to a hedge fund manager’s subsequent life. However, only industry experience leads to superior performance while both types of experience show relevance for survival and lock-up periods.