Small hedge funds outperform mid-size and large funds, and young funds outperform older ones, according to PerTrac.
A new report "Impact of Fund Size and Age on Hedge Fund Performance," found that funds with less than USD100 million in assets under management (AUM) returned 13.04% in 2010, compared to 11.14% posted by mid-size funds (USD100 million to USD500 million AUM) and 10.99% gains achieved by large funds (over USD500 million AUM). The study also found the performance of small and mid-size funds through the first six months of 2011 was better than their performance over the same period in 2010.
Young funds, defined by PerTrac as less than two years old, gained 13.25% in 2010, compared with gains of 12.65% and 11.77%, respectively, for mid-age funds in existence two to four years and "tenured" funds older than four years. Moreover, young hedge funds appear to have achieved these returns with less risk than their competitors.
PerTrac suggested several possible reasons why young funds excel, including that they were able to conduct portfolio changes more quickly and "under the radar," that their less mature administrative and operational needs result in lower fixed costs, and that new technologies allow them to perform their activities more efficiently in more scalable environments. Monte Carlo simulations indicate this trend could continue in the near and intermediate future, according to PerTrac.
"The 2010 and first half of 2011 findings continue to suggest that investors seeking to maximise their returns should examine funds with less than USD100 million in AUM or funds with less than two years of existence provided they fit their liquidity and allocation profile," says Lisa Corvese, Managing Director of Global Business Strategy, at PerTrac.
Until 2008, small funds have consistently beaten mid-size and large funds, according to the study. But in 2008–the only negative year for any of the sized based fund indices–small funds were the worst performers, declining -17.03%. In 2009, 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.
