Capacity Constraints and Hedge Fund Strategy Returns

18 Pages Posted: 4 Mar 2007  

Narayan Y. Naik

London Business School - Institute of Finance and Accounting

Tarun Ramadorai

Imperial College London; Centre for Economic Policy Research (CEPR)

Maria Strömqvist

Brummer & Partners

Abstract

Hedge funds have generated significant absolute returns (alpha) in the decade between 1995 and 2004. However, the level of alpha has declined substantially over this period. We investigate whether capacity constraints at the level of hedge fund strategies have been responsible for this decline. For four out of eight hedge fund strategies, capital inflows have statistically preceded negative movements in alpha, consistent with this hypothesis. We also find evidence that hedge fund fees have increased over the same period. Our results provide support for the Berk and Green (2004) rational model of active portfolio management.

Suggested Citation

Naik, Narayan Y. and Ramadorai, Tarun and Strömqvist, Maria, Capacity Constraints and Hedge Fund Strategy Returns. European Financial Management, Vol. 13, No. 2, pp. 239-256, March 2007. Available at SSRN: https://ssrn.com/abstract=967830 or http://dx.doi.org/10.1111/j.1468-036X.2006.00353.x

Narayan Y. Naik (Contact Author)

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 (Phone)
+44 20 724 3317 (Fax)

Tarun Ramadorai

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

HOME PAGE: http://www.tarunramadorai.com

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Maria Strömqvist

Brummer & Partners ( email )

Stockholm
Sweden

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