Business Commons^™

Diseconomies Of Scale In The Hedge Fund Industry, Melvyn Teo

Research Collection BNP Paribas Hedge Fund Centre

How does fund size impact fund performance in the hedge fund industry? We find unsurprisingly that fund size crimps both raw and risk-adjusted fund returns for the average hedge fund. An increase in fund assets under management from US$20m to US$1bn decreases fund alpha by 2.04 percent per year. However, significant variation exists across funds when funds are grouped by investment strategy and region. Equity long/short, event driven, and macro funds are susceptible to capacity constraints while fixed income and managed futures funds are largely immune to such concerns. Our finding that capacity issues impact macro fund performance raises fresh …