Small is beautiful

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.