Size, Age, and the Performance Life Cycle of Hedge Funds
62 Pages Posted: 10 May 2018
Date Written: April 26, 2018
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: Suggested Citation