Larger funds outperform small funds

Larger funds outperform small funds
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Larger funds outperform small funds
2009-06-01

(http://www.hedgefundsreview.com/public/showPage.html?page=859828)

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Larger funds outperformed smaller funds in 2008, according to a study by PerTrac Financial Solutions. This was the first time this has happened since the study began


Small funds averaged a loss of 17.03% in 2008 while medium-sized had average losses of 16.04%. Large funds were down 14.10% for the year.

Over the full history of the indexes from 1996 through 2008, small funds performed best, with an annualised return of 13.05% compared with 9.99% for medium-sized funds and 9.28% for large funds.

The small fund index also showed greater volatility over the 13-year period with an annualised standard deviation of 6.96% compared with 5.92% for medium-sized and 6.05% for the large fund indexes.

Hedge funds with the shortest track record continued their trend of superior performance in 2008 as the young fund index lost 11.31% for the year compared to much larger losses of 19.46% by the mid-age and -17.85% by older fund indexes.

Over the full history of the indexes from 1996 through 2008, young funds have generated an annualised return of 15.74% while mid-age returned 11.48% and older funds trailed with 10.12%.

Young funds have also fared best from a risk perspective over the long term with the young fund index producing an annualised standard deviation of 6.47% over the 13-year period. The mid-age and older indexes proved more volatile with annualised standard deviations with the 7.11% for the mid-age and 6.72% by the older fund indexes.

Meredith Jones, managing director at PerTrac, said there are several possible reasons why small funds underperformed their larger peers for the first time ever in 2008. "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," noted Jones.

She also said the recent market crash appeared to have prompted a flight to quality among investors. Hedge fund investors had become more interested in larger, more institutional funds.

Other possible reasons included infrastructure considerations, greater reliance on beleaguered prime brokers, and larger redemptions from poor performers pushing more managers into lower asset bands, said Jones.

"However, one year does not make 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," concluded Jones.

The study examined hedge fund returns, volatility and risk based on a fund's age and size. In each analysis, funds were categorised into one of three assets under management (AUM) size groups. These were up to $100 million, $100 million to $500 million and over $500 million

The funds were also categorised into one of three age groups: up to two years; 2-4 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.


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