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Capacity constraints and hedge fund strategy returns

Subject

Finance

Publishing details

BNP Paribas Hedge Fund Centre Working Paper Series

Authors / Editors

Naik N Y; Ramadorai T; Stromqvist M

Biographies

Publication Year

2006

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.

Publication Research Centre

Hedge Fund Centre

Series Number

HF-022

Series

BNP Paribas Hedge Fund Centre Working Paper Series