(January 3, 2013) – Location, location, location.
Apparently, the old real estate cliché holds true for hedge funds, as well. Analysts at boutique research firm Balter Capital have published what is reportedly the first ever study of geography and hedge fund returns.
Their findings are clear: California may have many attractive qualities, but robust hedge fund returns are not always one of them. Senior Analyst Benjamin Deschaine and his co-authors found seven cities in the United States with established hedge funds—San Francisco, Los Angeles, Dallas, Chicago, Boston, Greenwich, and New York—and compared their mean annualized returns from January 2000 to December 2011.
Chicago came out on top, posting a 12-year gain of 13.64%, followed by Boston at 11.90%. The remaining cities came in close together on the long horizon, with Greenwich and San Francisco returning the least (9.89% and 9.33%, respectively).
Greenwich’s weak 12-year performance does not tell the whole story of the Connecticut hedge funds, however. The city, which is home to AQR Capital Management and Oracle Investment Management, among many other funds and financiers, performed best in every period of market stress Deschaine studied.
Hedge funds in Greenwich’s nearby neighbor, New York City, suffered the worst drawdowns during the dot-com crash of 2000 to 2002 and the post- financial crisis slump in mid-2011.
“New York had a 0.88 correlation to the Russell 2500 Index [mid-cap equities],” the authors noted, “which is extremely high and implies to us that managers in the city are actively involved in trading mid-cap securities, perhaps to the point where they may be influencing the behavior of the underlying index.”
San Francisco’s start-up and tech culture likewise made their mark on the local hedge fund industry, according to the paper. Funds in Northern California correlated strongly to growth assets, benchmarked in the study by the Russell 2500 Growth Index. “The presence of venture capital firms and technology companies in the Bay area and the San Jose Peninsula likely foster a mentality of ‘growth investing’ in the hedge fund community,” the Boston-based analyst proposed. But the study also revealed more worrisome correlations for San Francisco funds. Firms based in both New York and the Bay Area track very close (0.92+) on average to three of the four hedge fund indexes used in the study.
According to Balter’s analysts, this correlation implies “that the managers in those cities are undifferentiated and performing in-line with the overall hedge fund industry.”
Read Balter Capital Management's entire study here.