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Crowded Chickens Farm Fewer Eggs: Capacity Constraints in the Hedge Fund Industry Revisited

38 Pages Posted: 16 Feb 2009  

Oliver Weidenmueller

RSM Erasmus University; Erasmus Research Institute of Management (ERIM); Netspar

Marno Verbeek

Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM); Netspar

Date Written: February 14, 2009

Abstract

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.

Keywords: Hedge funds, performance, alpha, flows, capacity constraints

JEL Classification: G10, G11, G23

Suggested Citation

Weidenmueller, Oliver and Verbeek, Marno, Crowded Chickens Farm Fewer Eggs: Capacity Constraints in the Hedge Fund Industry Revisited (February 14, 2009). Available at SSRN: https://ssrn.com/abstract=1343248 or http://dx.doi.org/10.2139/ssrn.1343248

Oliver Weidenmueller (Contact Author)

RSM Erasmus University ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Marno Verbeek

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands
+31 10 408 2790 (Phone)

HOME PAGE: http://www.rsm.nl/mverbeek

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Netspar

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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