Optimal Size of Hedge Funds: Conflict between Investors and Fund Managers

Yin, Chengdong

doi:10.2139/ssrn.2023819

Cited by 8 publications

(33 citation statements)

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“…Perold and Salomon Jr () also explain that there is an optimal size for investors: if a fund is too small, the fixed costs of running the fund are too high, and if a fund is too large, the liquidity issues and capacity constraints will reduce its performance. This is also confirmed by the findings of Yin (). He reports a positive relationship between fund managers' compensation and fund asset growth, and finds that managers allow fund size to grow beyond optimal size for performance to achieve a much larger fund size that maximizes their compensation.…”

Section: Introductionsupporting

confidence: 87%

Does size matter in predicting hedge funds' liquidation?

Becam

Gregoriou

Gupta

2018

Euro Fin Management

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In this study, we propose a set of covariates that exploit the information content of hedge funds' relative size, performance, growth, tail risk and past liquidation rate in predicting their liquidation. Empirical results show that our proposed covariates exhibit significant predictive power for up to two years even when we control for fund specific characteristics. Furthermore, we estimate separate liquidation prediction models for small, medium and large funds. Our findings suggest that liquidation likelihood of hedge funds is inversely related to fund size, and the statistical significance of factors affecting their liquidation varies across different size categories.

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Section: Introductionsupporting

confidence: 87%

Does size matter in predicting hedge funds' liquidation?

Becam

Gregoriou

Gupta

2018

Euro Fin Management

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“…A modest co-investment could pay off handsomely for managers if it causes AUM to grow significantly larger than without co-investment, regardless of hedge fund performance, indicating that the cost of a co-investment signal can be low for poor quality managers to imitate. As a result, high management fees become a big profit centre (Yin 2016) which distorts fund manager incentives. Fee-based incentive misalignment in the hedge fund industry is well documented; for example "zombie funds", such as the infamous collapse of Amaranth whose manager Brian Hunter lost $7 billion for Amaranth, but still collected more than $100 million in compensation after its demise.…”

Section: How Do Managerial Stakes In Their Funds Come About?mentioning

confidence: 99%

“…A modest co-investment could pay off handsomely for managers if it causes AUM to grow significantly larger than without coinvestment, regardless of hedge fund performance, indicating that the cost of a co-investment signal can be low for poor quality managers to imitate. As a result, high management fees become a big profit centre (Yin 2016) which distorts fund manager incentives.…”

Section: Self-selection Of Management Participation and Fund Survivormentioning

confidence: 99%

Hedge fund incentives, management commitment and survivorship

Qiu

Tang

Walter

2018

Financ Mark Portf Manag

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Studies investigating the relation between managerial ownership and hedge fund survivorship risk find mixed evidence because these studies fail to control for potential endogeneity of management commitment decision. We document that decisions on management ownership are purposely self-selected. Such decisions are most likely motivated by unique incentive mechanisms imbedded in hedge funds. By accounting for unobserved fund manager motivations that affect both ownership decisions, we find no association between the mortality risk of hedge funds and managerial ownership, which suggests that the conventional argument that having management commitment can reduce survival risk (and therefore align the interests between managers and investors) is significantly overstated. These results are robust to using alternative ownership measures and controlling for different samples.

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“…There is an expanding body of literature on the two first factors, i.e., the effects of some fund and fund management characteristics (see, for a recent example Yin, 2016). We consider both the age (AGE) and size (SIZE) of the funds to be relevant characteristics for analysis.…”

Section: Determinants Of Mutual Fund Performancementioning

confidence: 99%

Environmental conditions, fund characteristics, and Islamic orientation: An analysis of mutual fund performance for the MENA region

El‐Masry

Mingo‐López

Matallín‐Sáez

et al. 2016

Journal of Economic Behavior & Organization

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Islamic funds are increasingly seen as an alternative to conventional funds, in part due to the growing prominence of Islamic finance. In contrast to most previous literature, this paper focuses on the countries of the Middle East and North African region (MENA), and compares the performance of Islamic and conventional funds during crisis and recovery periods. Results show that the relative performance of Islamic and conventional funds seem to be conditioned by several factors such as the (geographical) context in which the investment is made. Considering the entire MENA region, Islamic funds perform, on average, slightly worse than conventional funds. However, if the analysis is restricted to Gulf Cooperation Council (GCC) countries, the result opposite is found. In addition, the performance gap between the two types of funds either widens or shrinks when considering recovery or crisis times, providing evidence that Islamic funds are more stable in times of distress.

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Optimal Size of Hedge Funds: Conflict between Investors and Fund Managers

Cited by 8 publications

References 0 publications

Does size matter in predicting hedge funds' liquidation?

Does size matter in predicting hedge funds' liquidation?

Hedge fund incentives, management commitment and survivorship

Environmental conditions, fund characteristics, and Islamic orientation: An analysis of mutual fund performance for the MENA region

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