Boutiques to Outperform Super-Sized Funds?

July 4, 2011

Executives at the 17th Annual GAIM International Conference 2011 in Monaco, billed as the World’s Largest Alternative Investment & Hedge Fund Conference, see better returns in the future from boutique funds than today’s super-sized funds.

Hedge fund strategies such as big global macro and managed futures funds could find it harder to trade positions in today’s constrained markets, versus smaller, more nimble boutiques, according to an article from Reuters.

“The feeling we have is that they (big commodity trading advisers and macro funds) all feel a bit too big compared to the real liquidity of the markets,” said Patrick Fenal, deputy chairman of asset manager Unigestion. “Correlation doesn’t help. Everything today is correlated. Growth in China, commodities, forex — that’s clearly a very bad environment for them.”

Global macro funds trade bonds, interest rates, currencies and commodities. Managed futures funds use computer-driven strategies that attempt to take advantage of fast-moving market trends.

Investors fled small funds during the financial crisis and the fallout from the Madoff scandal, opting for the security of large, established funds. Massive inflows of capital enabled funds such as Brevan Howard’s Master fund and Moore Capital, for example, to grow to the $25 billion and $17 billion range, respectively. But this size fund may no longer offer an investing advantage.

Investors are hungry for nimble fund managers who can generate alpha that is less correlated to the overall market. A smaller fund may be able to respond more quickly to fast-moving opportunities.

“Large funds may struggle to deliver higher quality returns — they’re sometimes forced to risk premium that hedge funds aren’t meant to take, such as beta. It may be harder for them to find idiosyncratic opportunities,” said Christophe Vogt, global head of hedge funds at Allstate Investments. “We’re watching some managers who are growing in size. If a manager for instance grows quickly from $1 billion to $5 billion and starts struggling, those are conditions for a yellow flag.”

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