Flow-Performance Relationship of Hedge Funds Before and After the Financial Crisis

By Lucas Cusimano and Ruby Zhang, The University of Chicago

This paper examines the determinants of U.S. hedge fund flow before and after the financial crisis using comprehensive hedge fund panel data. Hedge funds offer a unique testing ground for hypotheses about investor behavior due to their limited regulation structure. The financial recession of 2008 had large impacts on the financial world, and it is possible that the determinants of capital flows into hedge funds changed through this period. Investors are the drivers of flows on the individual, institutional, and governmental levels, and we find that past returns, past flows, size, and age precede inflows. Furthermore, we find that indeed the relationship between past returns, past flow, and size on present flow does change after the crisis. Past returns and past flow become less predictive of fund flows whereas there is more inflow to larger funds after the crisis.

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