Abstract: This paper studies how hedge funds acquire and act on public information about inter-firm links. We construct an investor learning network based on hedge funds' co-search patterns of firm filings on the SEC's EDGAR system. We find that peer firms identified through hedge fund searches exhibit strong return predictability and hedge funds actively trade on these insights. This advantage is particularly pronounced when information frictions are stronger, such as among firms with complex disclosures and low analyst coverage. Hedge funds also update their networks frequently and respond promptly to news covering related firms. Our results highlight a temporary pricing inefficiency in linked stocks that sophisticated investors exploit, shedding light on the competitive advantage of hedge funds processing public information.

Abstract: This paper explores the implications of salience theory (ST) in mutual funds. We find that mutual fund investor flows are sensitive to the salience of fund returns. The flow-ST relation is stronger among funds with limited information, such as small and young funds, and funds that spend less on advertisements. In addition, we provide evidence that fund managers are aware of the flow-ST relation and adjust their portfolio choices to attract investor flows. Finally, our analysis reveals that funds characterized by higher return salience do not achieve superior performance, and salience inadvertently redirects investments away from highly-skilled managers, impeding optimal capital allocation among mutual funds.

Abstract: This paper examines the impact of stock mispricing on firm investment. Leveraging various return anomalies, we show that overvalued (undervalued) firms tend to invest more (less). To establish causality, we exploit academic publications on anomalies as exogenous shocks to mispricing and find that firms experiencing a reduction in mispricing undergo a shift in investment. Furthermore, we find evidence for a catering channel that managers with compensation closely tied to equity returns engage more in mispricing-induced investment. Finally, overvaluation-driven investment yields higher short-term stock returns but inferior long-term performance. Overall, our findings suggest that stock mispricing distorts the real economy, and academic publications play a mitigating role in such distortions.

Abstract: We measure the alignment of interests (AOI) between hedge fund managers and their investors by the sensitivity of one party’s economic benefits to the other’s. For hedge fund managers, AOI strongly predicts future fund performance in that funds in the top decile of AOI outperform those in the bottom decile by 3% per year on a risk-adjusted basis. Funds with higher AOI appear to have less risky portfolios, engage less in risk-shifting, and exhibit lower attrition rates. In addition, fund investors allocate more capital to higher-AOI funds and punish such funds less for poor performance. Overall, our evidence highlights the importance of alignment of interests in delegated investment.

Abstract: Our paper examines the dollar value added by hedge funds. Using the metric of Berk and van Binsbergen (2015, BVB), we document that the value added of an average fund is $1.24 million per month, which is shared between managers and investors with a 60/40 split. Hedge fund complexity, measured as the proportion of exotic risk exposure to the total risk exposure, plays an important role in the economics of value added. Complexity can be a proxy for information asymmetry between managers and investors. Investors must spend higher search costs for more complex funds and thus are compensated more in the future. Managers adopting complex strategies can add more value in the next period. However, they experience money outflow due to the friction of search costs. Combined, better hedge fund managers adopting complex strategies, on average, are not better rewarded.