Size, Age, and the Performance Life Cycle of Hedge Funds

79 Pages Posted: 10 May 2018  

Chao Gao

Purdue University, Krannert School of Management

Tim Haight

Loyola Marymount University

Chengdong Yin

Purdue University - Krannert School of Management

Date Written: April 26, 2018

Abstract

Using an event time approach, we show that diseconomies of scale significantly contribute to performance declines with age in the hedge fund industry. Small funds outperform large funds and are more likely to maintain good performance. In addition, the contribution of the management fee to managers’ total compensation grows with fund size, suggesting decreasing incentives to improve performance. Lastly, declining performance is not significantly related to various fund and family-level characteristics. Overall, our results suggest that age effects on performance are largely driven by fund growth, and performance persistence is achievable when funds maintain a small size.

Keywords: Fund Size, Fund Age, Performance Life Cycle, Diseconomies of Scale

JEL Classification: G23

Suggested Citation

Gao, Chao and Haight, Tim and Yin, Chengdong, Size, Age, and the Performance Life Cycle of Hedge Funds (April 26, 2018). Available at SSRN: https://ssrn.com/abstract=3169312 or http://dx.doi.org/10.2139/ssrn.3169312

Chao Gao

Purdue University, Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Tim Haight

Loyola Marymount University ( email )

7900 Loyola Boulevard
Los Angeles, CA 90045
United States

Chengdong Yin (Contact Author)

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

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