Survey: Mid-Sized Hedge Funds Performed Best In 2013

Mar 27 2014 | 12:07pm ET

Mid-sized hedge funds outperformed their smaller and bigger rivals in 2013, according to new data from Preqin.

The data provider said hedge funds with assets under management of $100-$499 million and $500-$999 million posted 12-month average returns of 13.79% and 13.71%, respectively, in 2013.

By way of contrast, large funds (AUM of $1-$5 billion) returned 12.08% last year and small funds (AUM under $100 million) 11.45%.

Moreover, a lower percentage of mid-sized funds posted losses in 2013—12% of funds in the $100-$499 million category and 8% in the $500-$999 million category.

Preqin said 27% of mid-sized hedge funds with AUM of $100-$499 million posted returns in excess of 20% in 2013, higher than the proportion of larger hedge funds that achieved this (19%).

As fund size increased, the spread of performance between the 25th and 75th percentile returns narrowed. According to the report, the largest funds showed the smallest dispersion of returns, however these returns tended to be lower than funds with less than $1 billion in assets under management.

Top-performing funds with less than $100 million under management have shown the largest variation in risk-return profile over the three-year period ending January 31, 2014, exhibiting higher returns and higher volatility than their larger counterparts.

A poll of hedge fund investors revealed 48% consider returns a key factor when evaluating a fund manager and 21% said the potential for better returns was a key reason for considering smaller managers.

Preqin also reported that investors are looking across a wide range of fund sizes in 2014—57% are looking for large funds, 52% for funds in the $100-499 million category, 47% for funds in the $500-999 million category.

“Much of the capital inflow into the hedge fund industry over the past few years has been to just the largest funds, with investors looking for the proven track record and experienced investment teams that these larger hedge fund managers often provide,” said Preqin's Amy Bensted. “However, our analysis shows that investors are looking at a variety of fund sizes for investment in 2014 and different investors have different return objectives and risk appetite from their hedge fund investments. Performance remains a key factor in the selection process and Preqin’s latest research demonstrates that it is not always the largest funds that are providing the best performance in terms of risk and return.

“As funds become larger, the distribution of returns among the best performing funds moves towards the lower end of the return spectrum. Funds in the mid-sized groups, i.e., those from $100-$499 million or from $500-$999 million, have shown the highest mean and median returns in 2013. The size range $500-$999 million had the lowest proportion of funds suffering a loss in 2013, and the longer term return and volatility characteristics of these funds are similar to funds with assets of more than $1 billion. Therefore, those investors which are looking to move away from investing in just the largest funds, but without taking on too much volatility, may choose to look towards investing in those funds with more than $500 million in assets.”

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