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Capacity Constraints and the Opening of New Hedge Funds

Listed author(s):
  • Sugato Chakravarty


    (Purdue University)

  • Saikat Sovan Deb


    (School of Accounting, Economics and Finance, Deakin University, Australia)

In this paper we propose that hedge funds’ capacity constraints may play a significant role on the decision of fund families to open a new hedge fund. We argue that hedge fund families face diseconomies of scale because of the non-scalability of their investment strategies and, as their existing funds approach critical size, they prefer opening new hedge funds rather than allowing their existing funds to grow. Our empirical analysis shows that fund families’ propensity to open new funds increases with the degree of capacity constraints faced by the existing funds of the families. We find that fund families' strategy of starting new hedge funds is correlated with a decrease in fund flows to their existing funds, and that the introduction of new funds leads to an improvement in the performance of the existing funds within the same family.

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Paper provided by Purdue University, Department of Consumer Sciences in its series Working Papers with number 1015.

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Length: 59 pages
Date of creation: Jul 2012
Date of revision: Jul 2013
Handle: RePEc:csr:wpaper:1015
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