Capacity Constraints in Hedge Funds: The Impact of Cohort Size on Fund Performance
52 Pages Posted: 1 Dec 2017
Date Written: November 29, 2017
We propose a new method in investigating capacity constraints in the hedge funds sector. We introduce the concept of cohort size, measured by the total assets of all hedge funds applying similar strategies. Together, these funds impact opportunity costs and execution costs, so that the total cohort size, rather than simply the individual fund size, is associated with fund performance. The study documents cohort size to be negatively related to future quarterly returns. Furthermore, cohorts impact the propensity of hedge funds to accept additional assets, and attenuates the relation between fund performance and future fund flows.
Keywords: Hedge Funds; Capacity Constraints; Implementation Shortfall; Peer Groups; Performance
JEL Classification: G23
Suggested Citation: Suggested Citation