Capacity Constraints in Hedge Funds: The Impact of Cohort Size on Fund Performance

52 Pages Posted: 1 Dec 2017

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: November 29, 2017

Abstract

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

Forsberg, David and Gallagher, David R. and Warren, Geoffrey J., Capacity Constraints in Hedge Funds: The Impact of Cohort Size on Fund Performance (November 29, 2017). 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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