Onshore and Offshore Hedge Funds: Are They Twins?

Contrary to offshore hedge funds, US-registered (“onshore”) funds are subject to strict marketing prohibitions, accredited investor requirements, limited number of investors, and tax disadvantage. We exploit this difference to test predictions about organizational design, capital flow, and fund performance. We find that onshore funds impose stronger share restrictions such as a lockup provision than offshore funds, but hold more liquid assets. Our results show that capital flows are less sensitive to past performance in onshore funds than in offshore funds due to regulation on advertising, and the flow sensitivity difference affects performance. Liquidityadjusted alpha is positive and significant (0.94% per month) only for stand-alone onshore funds that have not been affected by strong capital flows from offshore investors through a masterfeeder structure.