The Life Cycle of Hedge Funds: Fund Flows, Size, Competition, and Performance
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The Life Cycle of Hedge Funds: Fund Flows, Size, Competition, and Performance Mila Getmansky Isenberg School of Management University of Massachusetts 121 Presidents Drive, Room 308C Amherst, MA 01003, USA [email protected]Published 19 July 2012 This paper analyzes the life cycles of hedge funds. Using the Lipper TASS database it provides category and fund speci¯c factors that a®ect the survival probability of hedge funds. The ¯ndings show that in general, investors chasing individual fund performance, thus increasing fund °ows, decrease probabilities of hedge funds liquidating. However, if investors chase a category of hedge funds that has performed well (favorably positioned), then the probability of hedge funds liquidating in this category increases. We interpret this ¯nding as a result of competition among hedge funds in a category. As competition increases, marginal funds are more likely to be liquidated than funds that deliver superior risk-adjusted returns. We also ¯nd that there is a concave relationship between performance and lagged assets under management. The implication of this study is that an optimal asset size can be obtained by balancing out the e®ects of past returns, fund °ows, competition, market impact, and favorable category positioning that are modeled in the paper. Hedge funds in capacity constrained and illiquid categories are subject to high market impact, have limited investment opportunities, and are likely to exhibit an optimal size behavior. Keywords: Competition; fund °ows; hedge funds; performance; optimal asset size; strategy capacity. 1. Introduction The hedge fund industry has grown tremendously since the ¯rst hedge fund was established in the 1920s. Since the late 1980s, the number of hedge funds has risen by more than 25% per year. The hedge fund industry saw a Quarterly Journal of Finance Vol. 2, No. 1 (2012) 1250003 (53 pages) ° c World Scienti¯c Publishing Company and Midwest Finance Association DOI: 10.1142/S2010139212500036 1250003-1
The Life Cycle of Hedge Funds: Fund Flows, Size, Competition, and Performance
