University of Oulu

Joenväärä, J., Kosowski, R., & Tolonen, P. (2019). The Effect of Investment Constraints on Hedge Fund Investor Returns. Journal of Financial and Quantitative Analysis, 54(4), 1539-1571. doi:10.1017/S0022109018001333

The effect of investment constraints on hedge fund investor returns

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Author: Joenväärä, Juha1,2; Kosowski, Robert2,3,4,5; Tolonen, Pekka1
Organizations: 1University of Oulu
2Imperial College Business School
4Oxford-Man Institute of Quantitative Finance
Format: article
Version: accepted version
Access: open
Online Access: PDF Full Text (PDF, 0.9 MB)
Persistent link:
Language: English
Published: Cambridge University Press, 2019
Publish Date: 2019-09-18


This paper examines the effect of real-world, investor-level investment constraints, including several that have not been studied before, on hedge fund performance and its persistence. Using a large consolidated database, we demonstrate that hedge fund performance persistence is significantly reduced when rebalancing rules reflect fund size restrictions and liquidity constraints but remains statistically significant at higher rebalancing frequencies. Hypothetical investor portfolios that incorporate additional minimum diversification constraints, minimum investment requirements, and focus on open funds suggest that the performance and its persistence documented in earlier studies of hedge funds is not easily exploitable, especially by large investors.

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Series: Journal of financial and quantitative analysis
ISSN: 0022-1090
ISSN-E: 1756-6916
ISSN-L: 0022-1090
Volume: 54
Issue: 4
Pages: 1539 - 1571
DOI: 10.1017/S0022109018001333
Type of Publication: A1 Journal article – refereed
Field of Science: 512 Business and management
Dataset Reference: Supplementary materials:
Copyright information: © Michael G. Foster School of Business, University of Washington 2018. Published in this repository with the kind permission of the publisher.