Crowded Chickens Farm Fewer Eggs: Capacity Constraints in the Hedge Fund Industry Revisited
RSM Erasmus University; Erasmus Research Institute of Management (ERIM); Netspar
Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM); Netspar
February 14, 2009
We revisit the question of capacity constraints in the hedge fund industry by looking at over 2,000 individual funds operating within ten different strategy segments over the years 1994 to 2006. By first looking at fund specific determinants of alpha returns, we demonstrate that the negative effect of inflows on performance is dominated by a concave size effect and thus nonlinear. Secondly, we investigate how competitive dynamics within a strategy segment influence alpha returns. The finding of a concave relationship between the total size of a segment and individual fund performance supports the notion of limiting capacity constraints on strategy level. While fund specific determinants only apply to funds that generated alpha in the past, strategy segment effects apply to all funds.
Number of Pages in PDF File: 38
Keywords: Hedge funds, performance, alpha, flows, capacity constraints
JEL Classification: G10, G11, G23
Date posted: February 16, 2009
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