The Efficiency and Productivity of Hedge Fund Families

Abstract

This study investigates the efficiency and productivity of 25 of the largest live offshore and onshore hedge fund families using basic data envelopment analysis (DEA) efficiency, game cross-efficiency, congestion analysis, and the Malmquist Productivity Index (MPI). The authors measure efficiency and productivity using assets under management as the main output in their nonparametric DEA models, and the number of employees and number of funds under management as their main inputs. They find that on a relative basis, most of the hedge fund families in the sample did not gain or lose a competitive edge from 2012 to 2016. In addition, they find that hedge funds have, for the most part, adapted their operations to reflect the challenging investment environment for active managers. However, the authors do find evidence of increased slack in pricing, which portends further downward pressure on management and incentive fees. Their findings should be useful for hedge fund families that are looking to optimize their operations given difficult market conditions. The authors also believe that using DEA to screen and select hedge fund families can benefit investors because hedge funds often charge high fees (especially when performance fees are factored in).

TOPICS: Real assets/alternative investments/private equity, performance measurement, manager selection