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Hedge-funds: How big is big? Marco Avellaneda

Summary: Hedge-funds: How big is big?
Marco Avellaneda
Courant Institute, New York University
Finance Concepts S.A.R.L.
Paul Besson
ADI Gestion S.A., Paris
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.
Capacity and manager skills


Source: Avellaneda, Marco - Department of Mathematics, Courant Institute of Mathematical Sciences, New York University


Collections: Mathematics