Capacity constraints in hedge funds: The relation between fund performance and cohort size

Forsberg, David and Gallagher, David R. and Warren, Geoffrey J., Capacity constraints in hedge funds: The relation between fund performance and cohort size (7 March 2022). Financial Analysts Journal, 2022, 78(2): 57-77. DOI: 10.1080/0015198X.2021.1996200. Available at SSRN: https://ssrn.com/abstrac

37 Pages Posted: 1 Dec 2017 Last revised: 16 May 2022

See all articles by David Forsberg

David Forsberg

Rozetta Institute

David R. Gallagher

Rozetta Institute

Geoff Warren

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Statistics

Date Written: October 4, 2021

Abstract

We provide evidence consistent with scale diseconomies for hedge funds being related to the aggregate assets pursing particular investment strategies. This study extends Forsberg, Gallagher, and Warren (2021) who identified skilled managers with persistent performance by forming peer cohorts of hedge funds using return correlations. Our analysis shows fund performance had a significant negative relation with cohort size, while the relation with fund size is inconsistent across specifications but evident where funds faced limited competition. We also document a weaker relation between performance and inflows where funds faced less competition, suggesting that cohort structure might influence propensity to accept assets.

Keywords: Hedge Funds; Capacity Constraints; Implementation Shortfall; Peer Groups; Performance

JEL Classification: G23

Suggested Citation

Forsberg, David and Gallagher, David R. and Warren, Geoffrey J., Capacity constraints in hedge funds: The relation between fund performance and cohort size (October 4, 2021). Forsberg, David and Gallagher, David R. and Warren, Geoffrey J., Capacity constraints in hedge funds: The relation between fund performance and cohort size (7 March 2022). Financial Analysts Journal, 2022, 78(2): 57-77. DOI: 10.1080/0015198X.2021.1996200. Available at SSRN: https://ssrn.com/abstrac, Available at SSRN: https://ssrn.com/abstract=3079971 or http://dx.doi.org/10.2139/ssrn.3079971

David Forsberg

Rozetta Institute ( email )

Sydney

David R. Gallagher (Contact Author)

Rozetta Institute ( email )

Sydney

Geoffrey J. Warren

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Statistics ( email )

CBE Building 26C
Kingsley Sreet, Acton
Canberra, ACT 0200
Australia

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