PerTrac: Larger Hedge Funds Outperformed Smaller Ones In ‘08

May 28 2009 | 8:26am ET

The widely held belief that emerging hedge funds tend to outperform older and larger funds may no longer be a valid thesis, according to study released today by PerTrac Financial Solutions.

The study by the financial services giant, which examined hedge fund returns, volatility and risk, based on a fund’s age and size, saw a partial reversal of the trend of new managers producing better returns than established funds—at least when it comes to the size of a fund.*

“Last year was a difficult one for hedge funds of all ages and sizes, but once again we saw younger funds outperforming older ones, confirming our findings from earlier studies,” said Meredith Jones, managing director at PerTrac. “However, when it comes to hedge fund performance as a function of fund size, we saw a reversal of the trend established from 1996 through 2007. During 2008, funds with the least assets actually performed the worst, while larger funds posted better returns.”

The study reveals that small funds averaged a loss of -17.03% in 2008, while medium-sized and large funds fared better, with average losses of -16.04% and -14.10% for the year, respectively. However, over the full history of the indexes, from 1996 through 2008, small funds performed best, with an annualized return of 13.05% versus 9.99% for medium-sized funds and 9.28% for large funds. Along with its stronger returns, the small fund index also showed greater volatility over the 13-year period with an annualized standard deviation of 6.96% versus just 5.92% and 6.05% for the medium-sized and large fund indexes, respectively.

“There are several possible reasons why small funds underperformed their larger peers for the first time ever in 2008. Due to losses across the board, hedge funds experienced heavy redemption requests last year. Larger funds generally have more cash on hand and greater access to lines of credit than small funds, better enabling them to handle redemption requests without compromising their portfolios’ performance,” Jones said.

“The recent market crash also appears to have prompted a ‘flight to quality’ among investors, with surveys indicating that hedge fund investors have become more interested in larger, more ‘institutional’ funds. So it’s likely that smaller funds had to deal with relatively greater redemptions than did their larger peers,” Jones said. “We also noted a larger differential in the number of large managers reporting in both the prior and current studies, with a larger percentage of small managers participating in both updates. As a result, there is heavier survivor bias in the large fund group. Other possible reasons include infrastructure considerations, greater reliance on beleaguered prime brokers, and larger redemptions from poor performers pushing more managers into lower asset bands.”

However, Jones emphasized that one year’s worth of data doesn’t add up to a trend.

“It will be interesting to see whether the small funds’ underperformance in 2008 proves to be a short-term exception to the rule or the start of an official trend,” she said.

*As in past studies, PerTrac conducted two different analyses: one based on a fund’s asset size, and the other based on a fund’s age. Monthly hedge fund returns were compiled from leading hedge fund databases and analyzed using the proprietary PerTrac Analytical Platform software. In each analysis, funds were re-categorized into one of three assets under management (AUM) size groups: up to $100 million; $100 million to $500 million; and over $500 million. The funds were also categorized into one of three age groups: up to two years; two to four years; and over four years. The mean fund return was calculated for each group in each month, creating three size-based monthly indexes and three age-based monthly indexes. Various risk and return statistics were calculated on the returns of each index to evaluate historical performance, and Monte Carlo simulations were run on each index to indicate probable ranges of future returns and drawdowns.

RELATED DOCUMENTS:

PerTrac’s 2008 Emerging Managers Study Update


In Depth

Q&A: Neil Azous Talks Global Macro Investing

Nov 24 2014 | 12:41pm ET

Neil Azous is the founder and managing member of Rareview Macro, an advisory firm...

Lifestyle

Scene Last Night: Clinton, Schwarzman, Corzine, Neidich, Diamond

Nov 25 2014 | 5:52pm ET

Steve Schwarzman had a granddaughter yesterday morning. Last night he sat one table...

Guest Contributor

Why The Big Money Is Going To Europe

Nov 14 2014 | 6:03am ET

Peer-to-peer lending was invented with the individual investor in mind. But despite...

 

Sponsored Content

    For Hedge Funds, Mastering Data Is Key To Success

    Nov 4 2014 | 9:45am ET

    Data management is important to every business, but for hedge funds, it is critical. FINalternatives recently asked Peter Sanchez, CEO of Northern Trust Hedge Fund Services, how fund managers can deal with the demands of managing data while at the same time remain transparent and abide by operational best practices. Read more…

Editor's Note

    Guidelines for Guest Articles

    Oct 22 2014 | 9:46am ET

    We are always looking for guest articles from hedge fund managers and buy-side firms.

    If you are interested in submitting a contributed piece for possible publication on FINalternatives, please take a look at the specs. Read more…

 

Futures Magazine

November 2014 Cover

Building a better market

Reg NMS created a huge bifurcation in equity markets and while much of what has followed has been positive, in terms of lower fees and greater liquidity, many traders would like to see the market come...

The Alpha Pages

TAP July/August 2014 Cover

The Alpha Pages Interview: Senator Rand Paul

Senator Paul sat down in the debut series of the Alpha Pages Interview to discuss the broken tax code, regulation surrounding Bitcoin, and his plans for the 2016 Presidential election.