The Impact of New Capital on Hedge Fund Returns

Abstract

The decline of the hedge fund return premium over mutual funds and other investment vehicles is well known. The authors investigate whether a portion of this decline is related to the inflow of capital into hedge funds. Additionally, they inquire whether either market-neutral or directional funds may be able to avoid the lower returns that come with rising assets. They find strong support for the first hypothesis regarding the relationship between returns and assets but find no support for the market-neutral/directional hypothesis. Style drift may explain their inability to confirm the second hypothesis.