Impact of Fund Size and Fund Flows on Hedge Fund Performance

Abstract

Capacity issues based on large inflows in well-performing hedge funds are among the most frequently discussed concerns in the hedge fund industry. In this article the impact of asset flows and fund sizes on hedge fund and CTA performance is investigated. The findings confirm the legitimacy of investor concerns regarding capacity issues in the hedge fund industry. The results of the empirical study suggest a strong negative relationship between fund sizes and hedge fund returns, standard deviations, Sharpe ratios, and alphas derived from an asset class multi-factor model.