Working Paper: CEPR ID: DP12599
Authors: Juha Joenvaar; Robert Kosowski; Pekka Tolonen
Abstract: This paper examines the effect of investor-level real-world investment constraints, including several which had not been studied before, on hedge fund performance and its persistence. Using a large consolidated database, we demonstrate that hedge fund performance persistence is significantly reduced when rebalancing rules reflect fund size restrictions and liquidity constraints, but remains statistically significant at higher rebalancing frequencies. Hypothetical investor portfolios that incorporate additional minimum diversification constraints, minimum investment requirements, and focus on open funds suggest that the performance and its persistence documented in earlier studies of hedge funds is not easily exploitable, especially by large investors.
Keywords: hedge fund performance; persistence; frictions; managerial skill
JEL Codes: G11; G12; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rebalancing frequency (C1) (F32) | hedge fund performance persistence (G41) |
| liquidity constraints (C2) (E51) | hedge fund performance persistence (G41) |
| rebalancing frequency (C1) and liquidity constraints (C2) (F32) | hedge fund performance persistence (G41) |
| hypothetical investor portfolios with additional constraints (G11) | hedge fund performance persistence (G41) |