Capacity Constraints and New Hedge Fund Openings
Posted: 22 Feb 2016
We provide empirical evidence that hedge funds’ capacity constraints may significantly influence fund families’ decision to open new hedge funds. Hedge fund families face diseconomies of scale because of non-scalability of investment strategies, as their existing funds approach the critical size, fund families may open new hedge funds rather than allow existing funds to grow. We find capacity constraints, both at fund family level and at fund strategy level, significantly affect fund families’ new fund opening decisions. Fund families’ propensity to open new funds increases with their capacity constraints; fund families’ strategy choice for the new fund is affected by strategy level capacity constraints. Our analysis also suggest that fund flows to the existing funds of families decrease following new fund opening by the same family; opening of new fund is associated with subsequent performance improvement of the existing funds within the families. And finally, funds that are introduced by capacity constrained families perform significantly worse than the funds introduced by non-capacity constrained families.
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