Bigger isn’t necessarily better for hedge funds.
Research from London’s Cass Business School found that smaller hedge funds perform better than their big counterparts during a crisis, reports the Financial Times. Between 1994 and 2014, hedge funds with £200 million on average outperformed funds with £5 billion by 125 basis point a year, and outperformed funds with £1 billion by about 61 basis points. The out-performance was particularly noticeable during the tech bubble and the financial crisis. The Cass researchers were surprised, expecting bigger funds with substantial risk management and research teams would clearly be able to handle a crisis better.
Big funds probably don’t need to worry about losing business any time soon. Institutional investors are comfortable with names they know, and find it easier to pitch an investment in a well known company to their board, says David Walker, director at Cerulli Associates. But, Walker told the FT:
“Smaller hedge fund managers are often hungrier for returns, and have portfolios that are not yet so large that their trading of instruments moves market prices, disadvantageously, in front of them. “As liquidity in some asset classes has decreased since the financial crisis — and many practitioners fear may fall sharply further come the next crisis — [the] advantage of nimbleness may become more apparent for smaller managers.”
Photo: LGO'Brien