Capacity Constraints and the Opening of New Hedge Funds

59 Pages Posted: 19 Aug 2012

See all articles by Sugato Chakravarty

Sugato Chakravarty

Purdue University

Saikat S. Deb

Deakin University - School of Accounting, Economics and Finance

Date Written: June 6, 2012

Abstract

In this paper we propose that hedge funds’ capacity constraints may play a significant role on the decision of fund families to open a new hedge fund. We argue that hedge fund families face diseconomies of scale because of the non-scalability of their investment strategies and, as their existing funds approach critical size, they prefer opening new hedge funds rather than allowing their existing funds to grow. Our empirical analysis shows that fund families’ propensity to open new funds increases with the degree of capacity constraints faced by the existing funds of the families. We find that fund families' strategy of starting new hedge funds is correlated with a decrease in fund flows to their existing funds, and that the introduction of new funds leads to an improvement in the performance of the existing funds within the same family.

Keywords: Hedge Fund, Capacity Constraints, New Fund Opening

JEL Classification: G10, G23

Suggested Citation

Chakravarty, Sugato and Deb, Saikat Sovan, Capacity Constraints and the Opening of New Hedge Funds (June 6, 2012). 25th Australasian Finance and Banking Conference 2012. Available at SSRN: https://ssrn.com/abstract=2131933 or http://dx.doi.org/10.2139/ssrn.2131933

Sugato Chakravarty

Purdue University ( email )

Consumer Sciences
1262 Matthews Hall Rm 214F
West Lafayette, IN 47906
United States
765-494-6427 (Phone)
765-494-0869 (Fax)

HOME PAGE: http://web.ics.purdue.edu/~sugato

Saikat Sovan Deb (Contact Author)

Deakin University - School of Accounting, Economics and Finance ( email )

Building lb Room 5.305
221 Burwood Highway Victoria
Burwood, Victoria 3125
Australia
0061 3 92517745 (Phone)
+61 3 9244 6283 (Fax)

HOME PAGE: http://www.deakin.edu.au/buslaw/aef/

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