Heterogeneous and Asymmetrical Relationships in Global Networks: The Hedge Fund Industry

Abstract

The global hedge fund industry, a technology-based network of varied organizational forms and relationships, was chosen as the context for this research in order to gain theoretical insight into relationships, networks and markets. Hedge funds are investment vehicles which are global, privately owned, based off-shore, and not required to reveal their investment strategy. There are approximately 8,000 hedge funds globally, managing $1.225 trillion (Hedge Fund Research, Inc.). Hedge funds are performance-driven and their managers share the profits generated through active investment skills, with the highest earning $1.5bn in one year (Institutional Investor, 2006). This research used qualitative methodology to investigate the perceptions primary relationships and of relationships in the network. The dyadic relationship investigated was that of the hedge fund manager with the prime broker, usually an investment bank. Qualitative research, based on 21 faceto- face in-depth interviews with hedge fund managers and industry informants, was tape recorded and transcribed. Respondents volunteered through contacts provided by the global hedge fund trade association, The Alternative Investment Management Association, Ltd. (AIMA), London. Results from the qualitative research show that hedge fund relationships are characterized by heterogeneity, asymmetry and “multiplicity, variety, and ambiguity” (Hakansson & Lundgren 1995: 296). The relationships are driven by performance and profitability. Hedge fund managers demonstrate aggressive competition for control of resources, which in this network are intangible services, e.g., ideas and information flow. The relationships demonstrate ambiguity. The relationships are both cooperative, working together to close a large deal which they are incapable of managing independently, and competitive, in seeking advantage through investment ideas and information. Time linked to information is a critical factor. The relationship investigated in this research, the hedge fund manager and the prime broker, an investment bank such as Goldman Sachs or Salomon Smith Barney, demonstrates the multi-level ambiguity of the network: it is on one level purely transactional and institutionalised, as the prime broker fulfils execution, settlement and back office functions for the hedge fund manager, and relational, in the exchange of ideas, information flow, and trading functions. Hedge fund managers have tiers of different types of relationships in the same firm in order to extract maximum value. Models of the network and relationships are provided from the perspectives of the enactants.