The thesis consists of three studies that address issues surrounding the scale-return relationship, risk-shifting behaviour of hedge fund managers, the evaluation of managerial skill and the agency problem in the hedge fund industry. Specifically, the first study examines the relationship between the performance and size of hedge funds and documents strong evidence of diseconomies of scale in the hedge fund industry. The first study also investigates the risk-shifting behaviour of hedge fund managers. It finds that managers are risk-averse when the incentive fee is in the money, risk-loving when the incentive fee is near the money, and managers tend to gamble when their funds are close to liquidation. The impact of the moneyness of the incentive fee is more profound for managers of small funds whose total compensation highly depends on the incentive fee. The second study investigates the managerial skill of hedge funds. It evaluates managerial skill based on the value-added skill metric, which considers both the return and size of hedge funds. This study discusses the limitations of the value-added skill metric and proposes a generalised model that overcomes these limitations. The study also documents strong evidence of managerial skill in the industry. The third study addresses the agency problem in the hedge fund industry by investigating the impact of altruism in choosing the optimal size of hedge funds. It shows that investors are better off with an altruistic hedge fund manager. Furthermore, the study finds that the compensation structure works better to motivate managers to deliver returns to investors if the fund is managed by an altruistic manager. The findings of the thesis not only contribute to the academic literature on the issue of diseconomies of scale in managed funds, but also highlight some important implications for both regulators and the investment community.