CXO Advisory has grabbed our attention with an interesting chart depicting the relationship between hedge fund size and future risk adjusted returns. They found such data in Melvyn Teo's paper, "Does Size Matter in the Hedge Fund Industry?" Some of Melvyn's conclusions are that,
- There is a negative, convex relationship between hedge fund size and future risk-adjusted returns (see the chart below). For example, an increase in
assets from $10 million to $500 million implies a decrease in annual abnormal returns of about 1.23%. - A portfolio comprised of the smallest 40% of hedge funds outperforms a portfolio of the largest 40% hedge funds (both rebalanced annually) by a risk-adjusted 3.65% per year.
- While new investments flow disproportionately to small funds, they do not do so quickly enough to eliminate the hedge fund size effect.
(click to enlarge)CXO Advisory
