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
Date Written: October 4, 2021
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: Suggested Citation