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A New Beauty Contest for Hedge Funds

A study by PerTrac finds that size and age matter in the performance of hedge funds where two years old and less than $100 million in AUM is key.

Are hedge funds going through a mid-life crisis? Are older hedge funds that that have fattened up their assets underperforming more nimble, technology-savvy startups? You might say so after looking at the results of a study by PerTrac, a provider of hedge fund analytics, which looked at the impact of fund size and age on hedge fund performance.

In a study released today, PerTrac, a provider of hedge fund analytics, found that funds with less than $100 million in assets under management returned 13.04 percent in 2010, compared to 11.14 percent posted by mid-size funds, ($100 million to $500 million AUM) and 10.99 percent gains produced by large funds (over $500 million AUM).

For the first six months of 2011, the study also found that the performance of small and mid-size funds was better than their returns over the same period in 2010.

Young funds, defined by PerTrac as less than two years old, gained 13.25 percent in 2010, versus gains of 12.65 percent and 11.77 percent respectively, for mid-age funds in existence for two to four years and “tenured “ funds older than four years, according to PerTrac.

Why are younger funds able to excel? Citing a number of reasons, PerTrac suggests that smaller funds are able to conduct portfolio changes more quickly and act under the radar; they have lower fixed costs due to less mature administrative and operational needs and that access to new technologies enables them to perform more efficiently in more scalable environments. After running MonteCarlo simulations, the firm said the trend could continue in the near and intermediate future.

According to PerTrac’s Lisa Corvese, managing director of Global Business Strategy, “Investors seeking to maximize their returns should examine funds with less than $100 million in AUM and less than two years of existence, provided they fit their liquidity and allocation profile.”

A long-term view showed that young funds have outperformed both mid-age and tenured funds in 13 out of the last 15 years, according to PerTrac’s study.

However, there is an exception to age/size theory. Until 2008, small funds had consistently beaten mid-size and large funds, according to the study. But in 2008, the only negative year for any of the sized-based indices- small funds were the worse performers, losing 17.03 percent. In 2009, small funds ranked in second place behind mid-size funds in performance, according to PerTac’s release.

One caveat — while small funds have generally outperformed mid-size and large funds —their risk profile remains the highest and simulation models suggest this trend could continue, notes PerTrac. So in other words, small hedge funds can produce high octane returns, but they could decline faster and have less to liquidity to cushion the blow.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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