Study: Younger, Smaller Hedge Funds Outperform

(September 27, 2011) — A new study by industry analytics provider PerTrac shows that smaller hedge funds performed best in 2010, while young funds outperformed their senior counterparts.

The firm’s latest report — Impact of Fund Size and Age on Hedge Fund Performance — showed that funds with under $100 million in assets under management returned 13.04% in 2010, while mid-sized funds ($100 million to $500 million) returned 11.14% and large funds (over $500 million) returned 10.99%.

“The 2010 and first half of 2011 findings continue to suggest that investors seeking to maximize their returns should examine funds with less than $100 million in AUM or funds with less than two years of existence provided they fit their liquidity and allocation profile,” commented PerTrac’s Lisa Corvese, Managing Director of Global Business Strategy, in a release on the findings.

According to PerTrac, until 2008, small funds have consistently beaten mid-size and large funds. However, in 2008 — the only negative year for any of the sized based fund indices — small funds were the worst performers, declining -17.03%. The following year, small funds came in second behind mid-size funds in performance. “But while small funds have generally outperformed mid-size and large funds, their risk profile remains the highest and simulation models suggest this trend could continue, as well,” PerTrac stated.

The firm indicated an array of potential reasons to explain the success of young funds. Some of these reasons include the ability to make portfolio changes more rapidly, lower fixed costs, and new technologies that enhance efficiency.

PerTrac’s findings compare with an earlier report by Russell investments that showed that global equities managers with fewer staff and funds under management outperformed larger management teams in charge of more capital. The research was gathered from 233 global equities managers that are part of Russell’s Global Equities Universe. According to Peter Gunning, Russell’s global chief investment officer, the findings are consistent with a long-established hypothesis that asset managers with fewer assets perform better than those with larger assets.

The complete hedge fund study by PerTrac is available for free download by clicking here.