Capacity Constraints, Investor Information, and Hedge Fund Returns
University of Oxford - Said Business School; University of Oxford - Oxford-Man Institute of Quantitative Finance; Centre for Economic Policy Research (CEPR)
May 2, 2011
Journal of Financial Economics (JFE), Forthcoming
To identify capacity constraints in hedge funds and simultaneously gauge how well-informed hedge fund investors are, we need measures of investor demand that do not affect deployed hedge fund assets. Using new data on investor interest from a secondary market for hedge funds, this paper verifies the existence of capacity constraints in hedge fund returns. The results provide more mixed evidence on the informedness of hedge fund investors. Both buy and sell indications arrive following periods of fund outperformance. While buy indications have little incremental power to predict hedge fund performance over and above well-known forecasting variables, sell indications do somewhat better.
Number of Pages in PDF File: 41
Keywords: hedge funds, capacity constraints, information, flows
JEL Classification: G11, G12, G23Accepted Paper Series
Date posted: December 22, 2009 ; Last revised: June 30, 2011
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