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.

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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.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

(September 26, 2011) — Mohamed El-Erian of Pacific Investment Management Co. (PIMCO), which runs the world’s biggest bond fund, is forecasting a European recession in 2012.

El-Erian, chief executive officer of PIMCO — with $1.34 trillion in assets under management — has asserted that there will be little-to-no economic growth in industrial nations over the next year as Europe’s economy contracts by up to 2%. Meanwhile, he said that the US will stagnate yet volatility will continue as a result of policymakers in Europe and the US having failed to take corrective action.

“For the next 12 months, the global economy will slow materially with advanced economies struggling to grow much above zero. Emerging economies will maintain faster growth, albeit not as high as the last 12 months,” Bloomberg cited El-Erian as saying during a September 24 interview in Washington. His comments come as world leaders gathered in Washington over the weekend for annual meetings of the International Monetary Fund (IMF) and the World Bank.

When asked for his thoughts on the crisis and about the seriousness of the situation by TheStreet, El-Erian replied: “This is a serious situation because the crisis in Europe is spreading. It’s still spreading today. So, not only have the Europeans not been able to contain it to Greece, they haven’t even been able to contain it to the periphery.”

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Last month, El-Erian voiced similarly negative views on the economic outlook of the US and the debt ceiling deal in Washington, saying that the deal won’t fix the root of the problem draining the nation’s economy. “The key issue…is that we simply cannot generate enough growth to get us over all these issues,” El-Erian said in an interview with CNBC. “Therefore, we have these structural headwinds that continue to slow us down. Until we see structural solutions we’re going to be stuck on the bumpy road to a new normal.”

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742