PerTrac Financial Solutions’ analysis of 2009 hedge fund performance reaffirms the existing trend of less tenured funds outperforming older ones and reverts to findings from earlier studies indicating that small to mid-sized funds outperform larger ones.
“Coming off the worst calendar year losses in history in 2008, the hedge fund industry provided investors with a strong comeback in 2009. According to our research, the rally was led by the younger funds,” says Jeff Hendren, co-president of PerTrac. “When we looked at performance according to the size of a fund, our research revealed that the small and mid-sized funds achieved the highest performance. These two findings are likely related because fund size tends to correlate with fund tenure.”
As in past studies, PerTrac conducted two different analyses: one based on a fund’s asset size, and the other based on a fund’s age. Monthly hedge fund returns were compiled from hedge fund databases and analysed using the PerTrac Analytical Platform.
For each of PerTrac’s fund size and fund age performance analysis, funds were categorized into one of three groups. For size, three groups were based on assets under management as follows: AUM up to USD100m; AUM of USD100m to USD500m; and AUM greater than USD500m. For age, the three groups were classified as funds with less than two years tenure; funds with two to four years; and funds with over four years.
Following the findings of previous studies, in 2009 the youngest funds returned an average of 19.81 per cent, while the mid-age and tenured funds gained an average of 18.65 per cent and 19.80 per cent, respectively. 2009 performance was the closest in the history of the study, with young funds outperforming tenured funds by only one basis point.
“One of the best explanations for the drop in outperformance by younger funds is the marked decline in the number of new funds that started in 2008 and early 2009,” says Hendren. “The number of potential managers choosing to sit out the market meltdown and wait for a better trading and capital raising environment could have been a drain on the overall performance of the group of younger funds.”
In PerTrac’s historical research from January 1996 to December 2007, examining the impact of size on hedge fund performance, analysis showed that smaller funds yielded higher returns than larger ones. 2008’s research differed by finding that larger funds had lower losses than smaller funds, perhaps not yielding overall capital growth, but certainly realising fewer losses (-14.10 per cent versus -17.03 per cent for smaller funds).
However, PerTrac’s update of this research for hedge fund performance in 2009 once again supports the findings from the full history of the indices: smaller funds perform best. In 2009, small and mid-sized funds achieved close performance of 19.78 per cent and 20.18 per cent respectively, significantly ahead of large funds at 17.00 per cent.
“As noted in PerTrac’s research for 2008, one year does not make a trend,” says Meredith Jones, director, strategic consulting at Barclays Capital, who collaborated with PerTrac on the update to the study. “With respect to size of a fund, while the smaller funds have demonstrated higher returns since 1996 – except for 2008 – the potential to produce a higher annualized return comes with higher volatility. This possibly explains why, in 2008, a year in which all fund sizes had negative returns, smaller funds were more negative than mid-sized or larger funds.”