This paper studies the effect of share restrictions on the flow-performance relation of individual hedge funds. As such, we reconcile previous research that shows conflicting results for this relation. Specifically, we find that hedge funds exhibit a convex flow-performance relation in the absence of share restrictions (similar to mutual funds), but exhibit a concave relation in the presence of restrictions—our evidence is consistent with both a direct effect of restrictions and an indirect effect that is due to endogenizing of restrictions by investors. Further, we find that the “live database ” exhibits a concave flow-performance relation due to capacity constraints, but that the “defunct database ” displays a convex relation due to the extreme (good and bad) performing funds that populate this database. Finally, we find that money is smart, that is, fund flows predict future hedge fund performance; however, this smart money effect is reduced among funds with share restrictions
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