Impact Of Size And Age On Hedge Funds Performance: 2015 Edition by eVestment
What’s New in the 2015 Edition
The 2015 edition of eVestment’s Impact of Size & Age on Hedge Fund Performance report continues to build on findings from last year’s report to provide insight into performance trends for funds of various sizes and ages. In response to feedback from eVestment clients, the 2015 edition includes the following new elements:
- Analysis by strategy, including alphas where applicable
- Trailing statistics (3 years, 5 years, 7 years)
- Performance during various economic climates
- Migration across fund sizes
- More granular AUM breakdown of the ? USD 1 billion group
- Analysis of the 30 largest, most prominent funds
- Appendix of underlying data presented in tables and charts, inclusive of investment market information not present in the body of the report
Beyond the addition of these new elements, we have also updated, where applicable, figures from the prior edition of the report as new fund performance and AUM records have been added to eVestment’s historical sample.
- The proportion of small (<$250m) hedge funds is declining across the hedge fund industry, while investor interest in medium ($250-$999m) and large (?$1b) hedge funds
seems to be growing as these two groups now make up their largest share of the reporting industry to date.
- The tendency for smaller funds to outperform has declined. By average annual returns, the dominant outperformance streak of small hedge funds ceased in 2009 and has been
- The hedge fund industry continues to mature. The highest proportion of young funds (51.89%) dates back to December 2003, mid-age funds (35.69%) less distantly to January 2008 and tenured funds (56.64%) most recently to January 2014.
- Age appears to play a greater factor in relative performance than size. Young (<2 years) funds posted the highest cumulative returns since 2003 and during the past 5 years have also outperformed mid-age (2-5 years) and tenured (>5 years) funds.
- Data confirms a marked increase in the size of new fund launches. Cross-sectional samples of size and age show the representation of medium-sized funds under 2 years of age has increased from under 8% pre-financial crisis, to just over 13% in 2013.
- Performance volatility tends to decline as AUM increases. In every year since 2003 the average medium fund has been less volatile than the average small fund, and the average large fund even less so than both. As a result, medium and large funds appear to have gained the upper hand over small funds in recent years on a risk-adjusted performance basis.
- It is extremely unlikely for a small fund to become large in a single year. Nine out of 10 times in our sample a small fund in one year remained a small fund in the next. It appears that outflows move faster than inflows when it comes to large funds becoming small versus small funds becoming large.
- During the worst drawdown period for the S&P 500 NTR in recent memory (Oct 2007 – Feb 2009), the average (median) prominent—group of 30 largest—fund was able to limit its cumulative losses to a minor -0.61% (-1.29%). This feat may be viewed as even more impressive considering how difficult it can be for these largest of hedge funds to shift in and out of positions due to scale.
- As the trailing period extends from 36 to 60 and 84 months, the performance results generally favor youth, as the average young fund outperformed both its peers in every 5 year trailing period apart from 2010 and every 7 year trailing period excluding 2011. The same results are found when comparing the median 5 and 7 year trailing figures except for the 2010 period in which the 7 year median mid-age fund outperformed the young fund.
- Within the tenured group the largest funds have been less volatile. The average large fund was continually less volatile than the average medium, and the medium kept a persistently lower standard deviation than the small.
- In 2014 the best performing strategy across all average size ranges was CTA/managed futures ex-commodities/FX. Securitized credit funds were the second highest small and large funds performers, and the third highest medium.
- Data indicates that a smaller proportion of long short equity hedge funds are large products. Among small funds, long short equity (Dev/Brd) comprised 36.25% of the universe on average in a given year, among medium funds 31.55%, and among large 22.40%. But that does not mean they disappear as the data by age scenario was opposite. Long short equity (Dev/Brd) comprised 29.52% of the young, 32.65% of the mid-age, and then 35.00% of the tenured fund universe on average.
- Although rare, a few strategies managed to generate positive average annual returns for all periods throughout 2003 – 2014. Small securitized credit, young securitized credit, all three young CTA/ managed futures fund types, young and mid-age market neutral equity (Dev/Brd) funds all had zero down periods, on average.
- Most strategies saw their alphas peak in 2009 (based on our chosen market benchmarks), as the financial crisis began to give way to a recovery. Alpha high points for macro and market neutral equity (Dev/Brd) funds were somewhat scattered throughout 2003 – 2014. Commodity and macro funds were the only two strategies to have positive average alphas across all size and age categories in 2008.
- Within the last four years, multi-strategy and long short equity (Dev/Brd) funds across the size and age spectrums were the only groups with just one instance of 5% or greater annualized alphas. The average large multi-strategy fund posted 6.96% in 2013 and the average young long short equity (Dev/Brd) 5.15% in the same year; all of their remaining alphas were below 5% within this period.
The hedge fund screening process for institutional investors and investment consultants encompasses a multitude of qualitative and quantitative components. Among the most frequently searched criteria are assets under management (AUM) and longevity. Impact of Size & Age on Hedge Fund Performance uses these two variables to provide insight into performance trends for funds of various sizes and ages.
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The report draws from the records of over 26,000 investment vehicles available in the eVestment alternatives database and parses the data into: (1) size and age indices encompassing all hedge funds for monthly performance information; (2) size and age universes comprised of hedge funds that survived (those with more than 10 monthly returns within yearly periods) for annualized performance and risk statistics.
For the size indices and universes, funds were required to have AUM and performance information for analysis. For the age indices and universes, only performance information was necessary. For cross sectional comparisons, AUM and performance data was required. All available fund records were utilized for the indices analysis and the eVestment alternatives database retains all fund records irrespective of their active or inactive status to mitigate survivorship bias. Historical returns for funds with a solid track record and for those with poorer performance streaks are also captured because performance since inception is a requisite for funds listing with eVestment, which aids in offsetting the effects of backfill, or instant-history, bias in the analysis.
Hedge funds were divided into three primary size and three primary age ranges:
Some investors may prefer examining hedge funds in narrower size bands; therefore, additional secondary size ranges were provided for cross sectional analysis. Hedge funds within each size and age classification were rebalanced annually to more closely coincide with investor timeframes which ordinarily extend beyond monthly and quarterly periods.
Fund sizes were determined by their last twelve month (L12M) maximum master AUM, or L12M maximum rolled up share class AUM if the master data was missing, because the typical fund screening process begins several months in advance of an allocation decision. Therefore, funds classified as small, medium, or large in one year were used in the following year’s performance metrics. Duplicate AUM data across master and share classes were removed along with highly correlated performance data.
Fund ages were determined by their performance length as of the December preceding the start of each annual period. Only unique fund records were kept. If share classes belonging to this unique fund record had AUM and performance information outside of its reported bounds, the additional information was appended to the record to more accurately capture assets and longevity. Funds with less than $1 million in AUM to start each annual period were not analyzed within that period.
Additional steps were taken to cleanse the AUM and performance records of funds. A fund’s maximum AUM was compared to its average and median AUM to identify potential data input errors. AUM values were corrected when possible, or otherwise removed to preserve a clean sample. Particular attention was placed on larger funds and those with maximum AUMs exceeding 10 times their average and medians. Performance records with zero, very low, or very high standard deviations were also examined, corrected when possible, or removed in an effort to offer a more refined analysis.
The $250 million threshold to denote a small fund was chosen to align with a theoretical minimum operating AUM to cover expenses. A prominent industry survey found that, “…without incentive fees or additional capital injections, managers should have somewhere between $250 million and $375 million in AUM…” to cover the expenses associated with running a fund.2 The $1 billion threshold to denote a large fund was chosen because funds of this size and above can typically absorb the allocations large institutional investors make without the institution becoming the fund’s dominant investor. Larger funds also have the resources to spend more on accommodative infrastructures for larger allocators.
The young, mid-age and tenured thresholds were chosen from experience in the management of an alternatives database with managers and investors communicating their perceptions of age. The 5 year threshold to denote a tenured fund is very close to the 50th percentile value of fund age.
Size and Age Indices: Number of Funds
Size and age indices were constructed using the equal weighted average of the performance returns of funds within their respective groups during each month. Any fund reporting a monthly performance figure was included within its respective index for that month, provided the fund met the criteria outlined in the methodology. The compositions of the size and age groups were rebalanced annually.
- The number of small funds reporting performance increased at the start of each year until reaching a peak of 2,342 in January 2007. In the ensuing years, and with the exception of January 2010, small funds experienced declines at the start of every year, eventually falling to 1,675 in January 2014, a -28.48% decline from the peak.
- The number of medium sized funds reached its apex in January 2012, at 579, a threefold increase from the 189 funds in January 2003. Large funds totaled 266 in January 2014, the highest of any period analyzed.
- A gradual decline has befallen the smallest hedge funds over the analysis period while the proportions of medium and large funds comprising the size group have ticked upwards. As of December 2014, medium funds comprised 22.27% of the size group and large 12.35%, their heftiest shares to date.
- The hedge fund industry has matured over the years. The number of young funds reporting hit a high of 2,099 in December 2006, mid-age funds 1,756 in January 2008, and tenured funds 2,217 in December 2012. The highest proportion of young funds (51.89%) dates back to December 2003, mid-age funds (35.69%) less distantly to January 2008 and tenured funds (56.64%) most recently to January 2014.
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