Investors Ignore Smaller Hedge Fund That Have Better Returns

In earlier posts, we noted that smaller hedge funds had better returns than large ones.  PerTrac did a study named Impact of Fund Size and Age on Hedge Fund Performance.  There were six conclusions from the research report:

• From January 1996 to December 2010,  hedge funds managing less than $500 million outperformed funds above that threshold in 10 of the 15 years.
• The smallest funds had the best performance.  Funds with less than $100 million in assets under management (AUM) had a return of 13.6% for the same timeframe.  Funds with $100 million to $500 million in AUM had a return of 10.87% and those with over $500 million in AUM had a return of 10%.
• In 2008, during the credit crisis, the reverse was true.  Large funds with over $500 million in AUM had better returns.
• In the first six months of 2011, the trend continued with large funds returning 0.83%.  Funds with less than $100 million in assets under management (AUM) had a return of 1.02%.  Funds with $100 million to $500 million in AUM had a return of 1.05%.  

However, institutional investors are not heeding this data.  According to Russell Investments, 80% of hedge fund assets are managed by funds with AUM over $1 billion.  The largest 10% manage 15% of the total assets.  Funds that are larger than $5 billion in AUM manage 62.4% of the industry's AUM.

The article was written by Michael Beattie, President and Chief Investment Officer of Tradex Global Advisors, and can be accessed here.