Capacity Constraints in Hedge Funds: The Relation between Fund Performance and Cohort Size

David Forsberg, David R. Gallagher, Geoffrey J. Warren

Research output: Contribution to journalArticleResearchpeer-review

Abstract

We provide evidence consistent with scale diseconomies for hedge funds being related to the aggregate assets pursing particular investment strategies. This study extends Forsberg, Gallagher and Warren who identified skilled managers with persistent performance by forming peer cohorts of hedge funds using return correlations. Our analysis shows fund performance had a significant negative relation with cohort size, while the relation with fund size is inconsistent across specifications but evident where funds faced limited competition. We also document a weaker relation between performance and inflows where funds faced less competition, suggesting that cohort structure might influence propensity to accept assets.

Original languageEnglish
Pages (from-to)57-77
Number of pages21
JournalFinancial Analysts Journal
Volume78
Issue number2
Early online date7 Mar 2022
DOIs
Publication statusPublished - 2022
Externally publishedYes

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