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The Effect of Investment Constraints on Hedge Fund Investor Returns

Juha Joenväärä, Robert Kosowski and Pekka Tolonen

No 12599, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: frictions; Hedge Fund Performance; Managerial Skill; Persistence (search for similar items in EconPapers)
JEL-codes: G11 G12 G23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk
Date: 2018-01
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