How Big Do Investors Want their Hedge Funds?

(March 19, 2014) — Large hedge funds may have been all the rage in recent years, but most investors are demanding managers with less than $5 billion in client assets this year, research has found.

Data from Preqin showed around half of a group of more than 4,000 wanted to put their hedge fund allocations to work with managers with less than $5 billion in assets. Just 36% said they would consider managers with more than $5 billion—the smallest proportion of respondents that favoured any size of manager.

“Much of the capital flows over the past few years have been into just the largest hedge funds in the industry with smaller funds finding it difficult to gain traction with the institutional market,” Preqin’s report said.

With this in mind, Preqin asked investors where they were targeting allocations in 2014—and which were the most important points for them to consider—and found that midsized managers came out top.

Track records and management experience were still the most important for investors, meaning those managers who had grown steadily but not to “behemoth” size stood to gain the most assets this year. Some 57% of respondents said they wanted to target managers with between $1 billion and $5 billion under management.

“Many investors are open to investing with smaller managers in 2014, with 52% of investors planning to invest with managers with assets under management of $100 million to $499 million and 42% open to investing in managers with less than $100 million in assets,” the report said.

Data from PerTac in 2012, showed smaller hedge funds had outperformed larger hedge funds on a risk-adjusted basis over the previous 15 years. Additionally, equity-focussed hedge funds with between $500 million and $3 billion performed the best out of their peer group in 2012, partly due to their size, according to a survey by Tabb Group.

This week, the largest pension fund in the US agreed to allocate substantial capital to a programme targeting small investment managers. The California Public Employee’s Retirement System confirmed its commitment to an emerging manager programme, started in 2012, adding to its private equity allocation in the sector. The pension system has around $30 billion allocated to smaller managers, with around $819 million run by boutique hedge funds.