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The Effect of Investment Constraints on Hedge Fund Investor Returns

Published online by Cambridge University Press:  08 October 2018

Juha Joenväärä ,
Robert Kosowski Open the ORCID record for Robert Kosowski [Opens in a new window]  and
Pekka Tolonen
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Abstract

This paper examines the effect of real-world, investor-level investment constraints, including several that have 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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Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 4 , August 2019 , pp. 1539 - 1571
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We thank Vikas Agarwal, Adam Aiken (the referee), Michael Brandt, Jennifer Conrad (the editor), Magnus Dahlqvist, Georges Hübner, Petri Jylhä, Mikko Kauppila, Niklas Kohl, Florencio Lopez-de-Silanes, Andrew Patton, Tarun Ramadorai, and seminar participants at the 2014 Annual Hedge Fund Research Conference in Paris, the 2013 Conference on Advances in the Analysis of Hedge Fund Strategies, the 2013 Norges Bank Investment Management Financial Research Conference, the EDHEC Business School, the Stockholm School of Economics, and the 2013 Young Scholars Nordic Finance Workshop for helpful comments. We are grateful for the support of OP Group Research Foundation.

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