Does Size Affect Performance?

The impact of size on the returns of mutual funds has long been the subject of interest in academic circles, however scholars have to date not managed to reach any consensus as to what the relationship looks like. This paper takes the question of size to a new level by analyzing if size is an important driver of performance due to its affect on factors that are driving performance. We find that size as a factor captures many and often opposing effects of factors that drive performance differently depending on a fund's size and evidence stemming from other research misses to capture this complex relationship. As much as size-driven factors such as liquidity costs, economies of scale and extreme net flows are affected by the size of a fund, they are also likely to vary with the characteristics of different markets and over time. We present the idea that, given the correct analytical model, it would be possible to derive the "perfect" fund size for a specific market. Knowing how size affects the performance of a fund is imperative for both investors and fund managers seeking to maximize returns.