Does size have an impact on Nordic Hedge Funds Performance?

Abstract

The paper examines the potential relationship between hedge fund’s size of assets under management and performance in the Nordic countries. We employ a modified version of the Fung and Hsieh’s seven-factor model to estimate the different hedge funds risk adjusted alphas, as a proxy for performance. The Nordic hedge funds are divided into five different investment styles; Equities, Managed Futures & CTA, Funds of Funds, Fixed Income and Multi Strategy to compare each hedge fund to their own category. Each hedge fund in the sample have at least 24 months of monthly returns and at most 36 months of returns during the period 01/01/2018 – 31/12/2020. Thereafter, we run a panel regression to investigate the relationship between assets under management and performance. The results convey insignificant results for Nordic hedge funds focused on Equities, Managed Futures & CTA, Funds of Funds and Fixed Income. The implication is therefore that no reliable conclusion can be drawn from the analysis for these four investment styles. However, we observe a concave relationship between performance and size of assets under management for Multi Strategy focused hedge funds. These results implies that Multi Strategy hedge funds in the Nordics, suffer from a diseconomy of scale scenario where performance of the hedge funds increase when size increase, up until a certain climax point. After the climax point is reached, performance instead decrease because of the hedge fund being too big. The economical magnitude of this relationship is although weak, which suggest that fund size does not impact performance in a larger scale.