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The Effect of Investment Constraints on Hedge Fund Investor Returns

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  • Kosowski, Robert
  • Joenväärä, Juha
  • Tolonen, Pekka

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.

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  • Kosowski, Robert & Joenväärä, Juha & Tolonen, Pekka, 2018. "The Effect of Investment Constraints on Hedge Fund Investor Returns," CEPR Discussion Papers 12599, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12599
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    Cited by:

    1. Yang, Fan & Havranek, Tomas & Irsova, Zuzana & Novak, Jiri, 2022. "Hedge Fund Performance: A Quantitative Survey," EconStor Preprints 260612, ZBW - Leibniz Information Centre for Economics.
    2. Yang, Fan & Havranek, Tomas & Irsova, Zuzana & Novak, Jiri, 2024. "Where Have All the Alphas Gone? A Meta-Analysis of Hedge Fund Performance," EconStor Preprints 289497, ZBW - Leibniz Information Centre for Economics.
    3. Joenväärä, Juha & Kauppila, Mikko & Kahra, Hannu, 2021. "Hedge fund portfolio selection with fund characteristics," Journal of Banking & Finance, Elsevier, vol. 132(C).
    4. Bali, Turan G. & Weigert, Florian, 2021. "Hedge funds and the positive idiosyncratic volatility effect," CFR Working Papers 21-01, University of Cologne, Centre for Financial Research (CFR).
    5. Kosowski, Robert & Joenväärä, Juha & Kaupila, Mikko & Tolonen, Pekka, 2019. "Hedge Fund Performance: Are Stylized Facts Sensitive to Which Database One Uses?," CEPR Discussion Papers 13618, C.E.P.R. Discussion Papers.
    6. Spilker, Harold D., 2022. "Hedge fund family ties," Journal of Banking & Finance, Elsevier, vol. 134(C).

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    More about this item

    Keywords

    Hedge fund performance; Persistence; frictions; Managerial skill;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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