PerTrac Study: The Large vs. Small Hedge Fund Battle

While smaller hedge funds are the long-term winners when it comes to performance, large funds outperform small funds in tough times, a new analysis shows.

(October 15, 2012) — Small hedge funds have a leg up compared to their larger rivals when it comes to long-term performance, according to new data from PerTrac, a financial software provider.

During down markets, however, the outlook for small funds is not as rosy.

According to PerTrac’s sixth annual report, “Impact of Size and Age on Hedge Fund Performance,” smaller hedge funds have outperformed larger hedge funds on a risk-adjusted basis over the past 15 years.

But during the financial crisis of 2008, large hedge funds returned an average -14.1%; midsize funds, -16.04%; and small funds, -17.03%. In 2009, midsize funds outperformed smaller and larger funds with an average return of 22.61%, compared to 21.5% and 18.72%, respectively. In 2011, large hedge funds returned an average -2.63%, compared to -2.78% for small funds and -2.95% for midsize funds.

“When you look at small funds, they’re generally younger. They’re trying to build up track records and they’re more likely to take risk,” Jed Alpert, PerTrac’s managing director of global marketing, told aiCIO. “We see that smaller hedge funds also tend to have higher volatility.”

PerTrac’s report added: “The 2011 findings suggest that investors with a lower volatility tolerance and seeking to protect their wealth should examine funds with over $500 million in asset under management, since the average large fund has exhibited lower annualized deviation figures compared to the average small fund…Investors with a higher volatility appetite and seeking to maximize their returns should examine funds with less than $100 million in assets under management, since the average small fund has outperformed the average mid-size fund and average large fund in 13 out of the last 16 years.”

Explaining the reason for superior performance among large hedge funds during down markets, Simon Lack, author of the “Hedge Fund Mirage,” commented that such funds often have a relatively larger amount of their investments in safer assets and can negotiate better terms due to their clout. “Because of their size and influence, larger funds may have better liquidity terms compared to smaller hedge funds, so they’re less likely to be forced to sell during falling markets,” Lack said.

Questions circulating around how assets under management influence performance is not unique to the hedge fund industry. In December 2011, aiCIO questioned in a magazine article whether the focus—and sometimes obsession—on assets under management when judging and predicting performance often erroneous thinking, reflect a breach in logic.