The Life Cycle of Hedge Funds: Fund Flows, Size, Competition, and Performance

75 Pages Posted: 14 Jun 2012

See all articles by Mila Getmansky Sherman

Mila Getmansky Sherman

University of Massachusetts at Amherst - Eugene M. Isenberg School of Management - Department of Finance

Date Written: May 7, 2012

Abstract

This paper analyzes the life cycles of hedge funds. Using the Lipper TASS database it provides category and fund specific factors that affect the survival probability of hedge funds. The findings show that in general, investors chasing individual fund performance, thus increasing fund flows, decrease probabilities of hedge funds liquidating. However, if investors chase a category of hedge funds that has performed well (favorable positioned), then the probability of hedge funds liquidating in this category increases. We interpret this finding as a result of competition among hedge funds in a category. As competition increases, marginal funds are more likely to be liquidated than funds that deliver superior risk-adjusted returns. We also find that there is a concave relationship between performance and lagged assets under management. The implication of this study is that an optimal asset size can be obtained by balancing out the effects of past returns, fund flows, competition, market impact, and favorable category positioning that are modeled in the paper. Hedge funds in capacity constrained and illiquid categories are subject to high market impact, have limited investment opportuniteis, and are likely to exhibit an optimal size behavior.

Keywords: Competition, Fund Flows, Hedge Funds, Performance, Optimal Asset Size, Strategy Capacity

JEL Classification: G10, G12, G20, G29

Suggested Citation

Getmansky Sherman, Mila, The Life Cycle of Hedge Funds: Fund Flows, Size, Competition, and Performance (May 7, 2012). Available at SSRN: https://ssrn.com/abstract=2084410 or http://dx.doi.org/10.2139/ssrn.2084410

Mila Getmansky Sherman (Contact Author)

University of Massachusetts at Amherst - Eugene M. Isenberg School of Management - Department of Finance ( email )

Amherst, MA 01003-4910
United States

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