Small Is Beautiful

Abstract

The authors examine the impact of fund size on investment performance. Ultimately every investment strategy will become self–defeating when too much money chases the same opportunity. It has therefore become common practice among successful fund managers to close funds to new money. It is mostly a mystery as to where and how this line gets drawn, especially since these restrictions are almost invariably lifted (with the pressure of increased client demand). Every asset management strategy has a natural limit beyond which growing a fund will significantly retard performance. The authors use real–life simulations to document how soon a performance drag sets in and how significant it is. They thus provide a framework to establish maximum fund size.