Study: Younger, Smaller Hedge Funds Performed Best In 2010

Sep 26 2011 | 1:52pm ET

Small hedge funds outperform their larger peers, while young funds outperform their seniors according to the latest data from industry analytics provider PerTrac.

According to PerTrac’s latest report—Impact of Fund Size and Age on Hedge Fund Performance—funds with under $100 million AUM returned 13.04% in 2010, while mid-sized funds ($100 million to $500 million) returned 11.14% and large funds (over $500 million) returned 10.99%.

The study also found the performance of small and mid-size funds through the first six months of 2011 was better than their performance over the same period in 2010.

Meanwhile, young funds—those under two years—gained 13.25% in 2010, while those between two and four years gained 12.65% and those over four years gained 11.77%. The PerTrac study also suggests newer funds outperformed older funds last year with less risk, and that they were found to have outperformed larger funds in 13 of the past 15 years.

PerTrac suggested several possible reasons for the success of young funds, including the ability to make portfolio changes more quickly and “under the radar;” lower fixed costs, thanks to less mature administrative and operational needs; and new technologies which allow them to perform their activities more efficiently in more scalable environments. Monte Carlo simulations indicate this trend could continue in the near and intermediate future.

“The 2010 and first half of 2011 findings continue to suggest that investors seeking to maximize their returns should examine funds with less than $100 million in AUM or funds with less than two years of existence provided they fit their liquidity and allocation profile,” commented Lisa Corvese, managing director of global business strategy, at PerTrac.

PerTrac says small funds beat larger funds consistently prior to 2008, but tanked in 2008, losing 17.03% (more than mid-sized or large funds). Small funds finished second to mid-sized funds in 2009. That said, small funds have also maintained the highest risk profile and simulation models suggest this trend could continue, as well.

In 2010, the average 2010 AUM of small funds was $26,152,437, mid-size funds $225,671,876, and large funds $1,847,867,623. Small funds comprised 1.25% of the total average AUM in 2010, mid-size 10.75%, and large 88.00%.

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