Smaller hedge funds have been outperforming mid-size and larger funds, and younger funds have been outdistancing older ones, according to recent research from PerTrac, a leading hedge fund analytics firm.
Their most recent report, “Impact of Fund Size and Age on Hedge Fund Performance,” was released this past week. It revealed that funds with less than $100 million in assets under management (AUM) averaged 13.04% returns in 2010, compared to 10.99% gains achieved by funds with more than $500 million in assets.
PerTrac also found that the performance of small and mid-sized funds for the first six months of 2011 outpaced the same period for 2010, according to a press release issued by the research firm.
Younger funds, as defined by PerTrac as less than two years old, gained 13.25% in 2010, compared to gains of 12.65% and 11.77% for funds 2-4 years old and funds older than four years, respectively. PerTrac suggested that this was because younger funds are able to implement portfolio changes more quickly than older funds. And that younger funds may have lower fixed costs, due to less mature administrative and operational needs. In addition, newer hedge funds may use technologies that enable them to perform administrative activities more efficiently, and in a more scalable manner.
“The 2010 and first half of 2011 findings continue to suggest that investors seeking to maximize their returns should examine funds with less than $100 million in AUM or funds with less than two years of existence provided they fit their liquidity and allocation profile,” commented Lisa Corvese, Managing Director of Global Business Strategy, at PerTrac.
Younger hedge funds have outperformed both mid-age and tenured funds in 13 out of the last 15 years. However, the flight to safety in larger funds has clearly not been impacted by the slight edge in performance by smaller, younger funds. In 2010, the average AUM of small funds was $26,152,437, mid-size funds $225,671,876, and large funds $1,847,867,623 according to PerTrac. That means smaller funds comprised just 1.25% of the total average AUM in 2010, versus mid-size at 10.75%, and large funds at 88.00%. You can download the full report at the PerTrac website.