market folly

PerTrac recently released an interesting study examining the impact of size and age on hedge fund performance.  Their study utilizes 15 global hedge fund databases and drew some key conclusions after examining things from 1996 to 2011.

Here's how they classify fund sizes:

Small: Less than $100 million in assets under management (AUM)
Mid-size: Between $100-500 million AUM
Large: Greater than $500 million AUM

Impact of Size & Age on Hedge Fund Performance: Key Takeaways


1. Large Funds Beat Small Ones in Down Years

- "Large funds dipped 2.63% on average in 2011, the least compared to the average small fund's 2.78%, and average mid-size fund 2.95% slides. Large funds also maintained lower annualized volatility statistics relative to small funds."


2. Small Funds Outperform Big Ones Over Time

"The average young fund has returned a cumulative 827%, since 1996 nearly double that of the 446% return for the average mid-age funds and well beyond the 350% posted by tenured funds."

This has been a popular conception among capital allocators for years as smaller managers can be more nimble and are hungry to prove themselves as they are often newer funds as well.


3. Seek Small Funds To Maximize Returns, Large Funds to Protect Wealth

Pertrac's managing director Jed Alpert concluded that, "The findings suggest that investors interested in exposure to hedge funds and seeking to protect their wealth should examine funds with over $500 million in AUM, since the average large fund has had lower losses in negative performance years and lower annualized deviation figures compared to the average small fund."


4. Impact of Fund Age on Performance

They classify young funds as ones with an inception date within the last two years, mid-age funds as being open between 2 to 4 years, and tenured funds as having operated greater than four years.

The study found that, "the cumulative return for the average young fund is 827%, since 1996, nearly double that of the 446% return for mid-age funds and well beyond the 350% posted by tenured funds. The report further shows that it has been an uneven journey. The average young fund has had 144 positive and 48 negative months since 1996, mid-age funds have had 136 positive and 56 negative, while tenured funds have had 129 positive and 63 negative."



Overall, when selecting a hedge fund (as with any investment), the study concludes that it's important for investors to identify their portfolio goals and risk tolerances as each fund type possesses different attributes.  You can check out the full study here.