Since NYU Courant's Marco Avellaneda was recently awarded the 2010 Quant of the Year distinction by readers of Risk Magazine, I thought it was worthwhile pointing up this unpublished working paper he wrote in collaboration with Paul Besson. It offers an interesting overview of capacity and manager skills in the hedge fund space, drawing attention to critical issues impacting performance.
Abstract
A popular radio show by the American humorist Garrison Keillor describes the mythical town of Lake Woebegone, Minnesota, ``where the women are strong, all the
men are good-looking and all children are above average’’. The steady increase of funds flowing into alternative investments suggests that some investors may hold similar beliefs when it comes to hedge funds.
Can this growth be sustained without eroding performance? We attempt to answer this question here by considering the evolution of returns of the hedge-fund industry since 1988. Since assets under management (AUM) in hedge-funds increase every year, we use the notion of asset-weighted returns to estimate how the industry performs across time. Comparing this evolution to the returns of stock and bond indices, we find rough estimates on the total size that alternative investments in hedge funds can reach and how far we are today from saturation.
Download the Paper (pdf)
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