THE NEXUS BETWEEN HEDGE FUND SIZE AND RISK-ADJUSTED PERFORMANCE
DOI:
https://doi.org/10.2478/subboec-2021-0013Keywords:
hedge funds, risk-adjusted performance, fund size, fund performanceAbstract
This paper explores the relationship between hedge fund size and risk-adjusted performance employing a data sample of 245 US hedge funds classified into eight different investment strategies. The studied period spans from January 2005 to February 2021, with calculations performed both on the whole coverage period as well as three sub-periods, to isolate the pre-crisis, crisis, and post-crisis funds’ behavior. Similar to previous evidence found in the literature, the results reveal an inverse relationship between hedge fund size and risk-adjusted performance (as measured by the Sharpe, Treynor and Black-Treynor ratios) in most of the cases.
JEL classification: G11, G23, G32.
References
Agarwal V., Daniel N., Naik N. Y. (2004) Flows, Performance, and Managerial Incentives in the Hedge Fund Industry, Working Paper, London Business School
Amenc N., Sfeir D., Martellini L. (2003) An integrated framework for style analysis and performance measurement, Journal of Performance Measurement, 4 (4), 35 - 41
Ammann, M., Moerth, P. (2005) Impact of fund size on hedge fund performance, Journal of Asset Management, 6 (3), 219–238
Barth D., Joenvaara J., Kauppila M., Wermers R. (2021) The Hedge Fund Industry is Bigger (and has Performed Better) Than You Think, OFR Working Paper 2020/01
Basile I. (2016) Asset Management and Institutional Investors, Springer International Publishing
Black F. (1972) Capital Market Equilibrium with Restricted Borrowing, Journal of Business, 45 (3), 444-455
Black F., Jensen, M., Scholes, M. (1972) The Capital asset pricing model some empirical tests, Studies in the Theory of Capital Markets, 79-121, New York: Praeger
Bodie Z., Kane, A., Marcus, A. J. (2011) Investments. The McGraw-Hill/Irwin, New York
Broeders D. W. G. A., van Oord A., Rijsbergen D. R. (2019) Does it pay to pay performance fees? Empirical evidence from Dutch pension funds, Journal of International Money and Finance, 93, 299-312
Chen J., Hong H., Huang M., Kubik J. D. (2004) Does Fund Size Erode Mutual Fund Performance? The Role of Liquidity and Organization, American Economic Review, 94 (5), 1276–1302
Connor, G. (1995) The three types of factor models: A comparison of their explanatory power, Financial Analysts Journal, 51 (3), 42–46.
Dragomirescu-Gaina C., Philippas D., Tsionas M.G. (2021) Trading off accuracy for speed: Hedge funds' decision-making under uncertainty, International Review of Financial Analysis, 75
Escobar-Anel M., Höhn V., Seco L., Zagst R. (2018) Optimal fee structures in hedge funds, Journal of Asset Management, Palgrave Macmillan, 19 (7), 522-542
Gao C., Haight T., Yin C., Zhang C. (2020) Fund selection, style allocation, and active management abilities: Evidence from funds of hedge funds’ holdings, Financial Management, 49, 135 - 159
Gao C., Haight T., Yin C., Zhang C. (2021) The Performance Life Cycle of Hedge Funds: Can Investors Achieve Lasting Performance?, Social Science Research Network (SSRN), New York, 1-86
Getmansky M., Lo A. W., Makarov I. (2004) An econometric model of serial correlation and illiquidity in hedge fund returns, Journal of Financial Economics, 74 (3), 529-609
Goetzmann W. N., Ingersoll J. E., Ross S. A. (2003) High-Water Marks and Hedge Fund Management Contracts, Journal of Finance, 58 (4), 1685-1718
Gregoriou G. N., Rouah F. (2002) Large versus Small Hedge Funds: Does Size Affect Performance?, Journal of Alternative Investments 5 (4), 22-42
Harri, A., Brorsen B. (2004) Performance persistence and the source of returns for hedge funds, Applied Financial Economics, 14 (2), 131-141
Hedges, J. (2003) Size vs. performance in the hedge fund industry, Journal of Financial Transformation, 10 (1), 14-17
Indro D. C., Christine X., Jiang M., Hu l Y., Wayne Y. L. (1999) Mutual Fund Performance: Does Fund Size Matter?, Financial Analysts Journal 55 (3), 74-87
Jensen M. (1968) The performance of Mutual Funds in the Period 1945-1964, Journal of Finance, 23 (2), 389-416
Jones M. A. (2009) Update to An Examination of Fund Age and Size and Its Impact on Hedge Fund Performance, Journal of Investing, 18 (1), 108-114
Koh F., Koh W. T. H., Teo M. (2003) Asian Hedge Funds: Return Persistence, Style, and Fund Characteristics, Working Paper 1-42. Research Collection Lee Kong Chian School of Business
Kouwenberg R., Ziemba W. T. (2007) Incentives and risk taking in hedge funds, Journal of Banking & Finance 31 (11), 3291-3310
Lhabitant F. S. (2004) Hedge funds: Quantitative insights. John Wiley & Sons, Ltd, 177–178
Liang B. (1999) On the Performance of Hedge Funds, Financial Analysts Journal 55 (4), 72–85
Philippas D., Dragomirescu-Gaina C., Goutte S., Khuong N. D. (2021) Investors’ attention and information losses under market stress, Journal of Economic Behavior & Organization 191, 1112-1127
Pollet J., Mungo W. (2008) How Does Size Affect Mutual Fund Behavior?, Journal of Finance 63 (6), 2941–69
Roll R. (1977) A critique of the Asset Pricing Theory’s Tests, Journal of Financial Economics 4, 129-176
Schneeweis T., Kazemi H., Martin G. (2002) Understanding hedge fund performance: research issues revisited — Part I. The Journal of Alternative Investments, 5 (3), 6–22
Sharpe W. (1964) Capital Assets Prices: A Theory of Market Equilibrium Under Conditions of Risk, Journal of Finance, 19 (3), 425-442
Stafylas D., Anderson K., Uddin M. (2016) Recent advances in hedge funds' performance attribution: Performance persistence and fundamental factors, International Review of Financial Analysis, 43, 48-61
Yan X. (2008) Liquidity, Investment Style, and the Relation between Fund Size and Fund Performance, Journal of Financial and Quantitative Analysis, 43 (3), 741–767
Yin C. (2016) The Optimal Size of Hedge Funds: Conflict between Investors and Fund Managers, Journal of Finance, 71 (4), 1857–1893
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2021 Studia Universitatis Babeș-Bolyai Oeconomica
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
