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Age Matters More Than Size in Hedge Fund Performance, Says Study

While smaller hedge funds have performed better than their larger brethren, a new study notes that from January 2009 small funds generated the lowest performance of three fund types studied.

According to a study published in April of 2014 by eVestment’s research division titled “Impact of Size and Age on Hedge Fund Performance: 2003 – 2013,” smaller funds had the highest cumulative return from January 2003 to December 2013, at 122.01%. Medium sized funds came 92.86% while large funds generated 82.32%.

Hedge fund: Small funds didn’t fare well from 2009 to 2013

When the study looked at the period after the financial crisis, however, considering performance from January 2009 through December 2013, the results changed.  The cumulative return of small funds was the lowest of the three, while that of the medium fund index was highest. During this 5 year period, the small fund returned a cumulative 42.55%, the medium fund index 49.29%, and the large fund index 44.15%.

Hedge fund: Performance factors in positive small fund outperformance can vary 

The report noted that when younger funds do outperform, it may be due to a variety of factors.  Delaying a launch due to difficulties could be a factor, the report noted, as well as younger funds targeting emerging opportunities and “willingness to accept more risk may also play a meaningful role for some as a substantial portion of earnings will likely come from incentive fees needed to continue operations and develop strong comparable track records,” the report said, in a strong statement. “Lastly, employees of already successful, larger hedge funds firms may start their own funds, bringing with them valuable experience and a proven successful skillset.”

Hedge fund: Large funds continue to dominate asset flow

Assets continue to flow to large funds in disproportionate levels. Average small fund AUM declined by 5.52% in 2010 from the prior year, the report noted, speculating that because robust performance gains in 2009 lifted the bigger small funds into the medium category to start 2010.  Average AUM has risen by 23.95% since.  “Money seems to have flowed primarily to the largest hedge funds, even during the global financial crisis, because average AUM has not declined in a single year since at least 2003, while the average AUMs of small and medium sized funds have fluctuated,” the report noted.

The report also found that the proportion of small hedge funds is declining, while investor interest in medium and large hedge funds seems to be increasing as these two groups now make up their largest share of the industry to date.  Potentially explaining part of this, the report concluded that the average AUM for large hedge funds has not declined in a single year since at least 2003, while the AUMs of the average small and average medium have fluctuated.

In perhaps its most shocking statement, the report noted that age appears to play a greater factor in relative performance than size, the report concluded.

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Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com