Topic:

Are Hedge Fund Capacity Constraints Binding? Evidence on Scale and Competition

Time&Date: 

8:30 AM-10:00 AM, 2021/1/22 (Friday)

Speaker:

Prof. Charles Cao (Pennsylvania State University)

An important question in hedge fund management is whether hedge funds experience decreasing returns to scale, as hedge fund managers often pursue arbitrage opportunities which are limited and short-lived. Extant literature has presented evidence of decreasing returns to scale at the hedge fund level based on OLS regressions. Employing a recently developed, unbiased estimation method based on recursive demeaning, we find no evidence of decreasing returns to scale at the hedge fund level. However, we do find evidence that hedge fund returns are decreasing in industry size. Further tests suggest that inter-hedge fund competition drives this result. Additionally, we examine the evolution of raw managerial skill of hedge funds over time and find that while fund performance deteriorates as funds grow older, controlling for this deterioration does not mitigate the detrimental effects on performance due to the industry becoming more competitive.

Biography:

Charles Cao is The Smeal Chair Professor of Finance at the Department of Finance, the Smeal College of Business at the Pennsylvania State University. He received his Ph.D. in Finance from University of Chicago's Graduate School of Business in 1993, M.S. from University of Kentucky in 1988, and B.S. from Peking University in 1984. Professor Cao's research interests include hedge funds, mutual funds, derivative securities markets, market microstructure, and credit risk.  His research has been published in a wide range of academic journals, including the Journal of Finance, Review of Financial Studies, Journal of Financial Economics, Journal of Financial and Quantitative Analysis, Management Science, Journal of Financial Markets, and Journal of Econometrics.

Professor Cao won competitive research grants from the BNP Paribas Hedge Fund Center (2013), CFA Society (2013), the Real Estate Research Institute (2012), the Q-group (2010), the BNP Paribas Hedge Fund Center (2009), Federal Deposit Insurance Corporation-FDIC (2006-2007), and Morgan Stanley (2004).  He was also selected Fellow of FDIC Center for Financial Research in 2006.  He serves as an editor/associate editor of Pacific-Basin Finance Journal, an associate editor of Journal of Financial Markets, Review of Derivatives Research, Review of Quantitative Finance and Accounting, and Annals of Economics and Finance.  He has taught M.B.A. and Ph.D. courses at the Smeal College of Business, Penn State University.  He also served as program chair of 2005 - 2008 China International Conference in Finance, sponsored by Tsinghua University and Sloan School of Management, MIT.