Share Restrictions and Investor Flows in the Hedge Fund Industry
State University of New York at Albany - School of Business
University of Massachusetts at Amherst - Eugene M. Isenberg School of Management - Department of Finance & Operations Management
University of Massachusetts at Amherst - Department of Finance & Operations Management; China Academy of Financial Research (CAFR)
University of Maryland - Robert H. Smith School of Business
November 16, 2009
This paper studies the effect of share restrictions on the flow-performance relation of individual hedge funds. As such, we reconcile previous research that shows conflicting results for this relation without explicitly considering restrictions. Specifically, we find that hedge funds exhibit a convex flow-performance relation in the absence of share restrictions (similar to mutual funds), but exhibit a concave relation in the presence of restrictions - our evidence is consistent with both a direct effect of the binding restrictions and an indirect effect that is due to investors endogenizing expected future binding restrictions when investing their money. Further, we find that live funds exhibit a concave flow-performance relation due to stricter flow restrictions than defunct funds, which display a convex relation. Finally, we find that money is “smart,” that is, fund flows predict future hedge fund performance; however, this “smart money” effect is eliminated among funds with greater share restrictions.
Number of Pages in PDF File: 63
Keywords: hedge fund flows, share restrictions, asset illiquidity, life/defunct funds, smart money effect
JEL Classification: G23, G11working papers series
Date posted: March 21, 2006 ; Last revised: July 12, 2011
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