When it comes to hedge fund performance, size and age matter.
PerTrac Financial Solutions has added its weight to the widely held belief that emerging hedge funds perform better than older, larger funds in its updated Emerging Manager Study, originally released in March 2007.
“Our original study, released early last year, asserted that smaller, younger hedge funds outperform larger, older hedge funds, based on research spanning January 1996 to July 2006,” said Meredith Jones, managing director of PerTrac. “The new study, which includes data through December 2007, confirms the original results.”
PerTrac performed two different analyses, one based on fund asset size, and one based on fund age. In each analysis, funds were re-categorized each month from January 1996 through December 2007 into one of three size groups: up to $100 million; over $100 million and up to $500 million; and over $500 million. They were also categorized into one of three age groups: up to two years; two to four years; and over four years.
In 2007, the average return of small funds in the index was 11.74%, while the medium-sized and large funds returned 10.27% and 10.22%, respectively. In addition, both the annualized return and annualized standard deviation over the full length of the study, from 1996 through 2007, continue to be greatest for the smallest funds, at 16.01% and 6.17%, respectively, according to PerTrac. The annualized returns were lowest for the largest funds, at 11.50%, and the standard deviation was lowest for the mid-sized funds at 5.17%. Those statistics suggest that, as funds get larger, monthly returns decrease in magnitude but also become steadier, or less risky.