Study: Hedge Funds That Launch Big Often Underperform

Jun 30 2011 | 8:11am ET

Starting out big doesn’t necessarily guarantee success in the hedge fund world, according to a study of Asian (excluding Australia and Japan) fund launches by hedge fund consultant GFIA.

GFIA looked at 510 fund launches between 2000 and 2010 and found that “large” funds—those that launched with over $75 million AUM—consistently underperformed their peers in all subsequent years.

Said Peter Douglas, principal of GFIA: “For experienced allocators these are intuitive findings. Nobody is surprised to learn that large funds experience a ‘snowball’ effect, raising assets quickly—nor that large fund launches are a reliable predictor of underperformance. What’s surprising is that investors continue to back larger funds, knowing they’re likely to underperform.”

GFIA’s study found that funds launched with AUM of less than $5 million showed little predictability of performance relative to their peers while funds launching with AUM between $10 million and $25 million tend to show the most consistent performance.

The study also found that funds that close down do so, on average, in 2.5 to 4 years for most strategies.


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