Can Liquidity Risk Explain Diseconomies of Scale in Hedge Funds?

Hany A. Shawky () and Ying Wang
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Hany A. Shawky: Center for Institutional Investment Management (CIIM) and School of Business, University at Albany, State University of New York, Albany, NY, USA
Ying Wang: Center for Institutional Investment Management (CIIM) and School of Business, University at Albany, State University of New York, Albany, NY, USA

Quarterly Journal of Finance (QJF), 2017, vol. 07, issue 02, 1-35

Abstract: Using data from the Lipper TASS hedge fund database over the period 1994–2012, we examine the role of liquidity risk in explaining the relation between asset size and hedge fund performance. While a significant negative size-performance relation exists for all hedge funds, once we stratify our sample by liquidity risk, we find that such a relationship only exists among funds with the highest liquidity risk. Liquidity risk is found to be another important source of diseconomies of scale in the hedge fund industry. Evidently, for high liquidity risk funds, large funds are less able to recover from the relatively more significant losses incurred during market-wide liquidity crises, resulting in lower performance for large funds relative to small funds.

Keywords: Liquidity risk; hedge funds; asset size; performance; diseconomies of scale (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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DOI: 10.1142/S2010139217500021

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