Examination of fund age and size and its impact on hedge fund performance
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Meredith Jones is Managing Director, PerTrac Financial Solutions, New York.
Practical applications Hedge funds are an increasingly popular investment option for both high net worth and institutional investors. With an increasing number of funds from which to choose, it is imperative that investors find ways to narrow down their investment options and evaluate managers.
Abstract This paper attempts to discover whether smaller, younger hedge funds offer stronger performance than larger, older hedge funds. Using indices created with six subsets of hedge fund data (small, medium, large, young, mid-age and older funds, as defined herein) and Monte Carlo simulations, we examine the performance, volatility and risk profiles of each fund group. Derivatives Use, Trading & Regulation (2007) 12, 342–350. doi:10.1057/palgrave.dutr.1850052 Keywords: hedge funds; age; size; performance; returns; risk
INTRODUCTION There is an old adage that states ‘Age and treachery will always overcome youth and skill’. However, it is questionable whether or not this maxim is indeed true when it comes to hedge fund investments. The issue of hedge fund age and size, and its potential impact on performance has been a
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topic of frequent debate over the past five years. Certainly, hedge funds — large and small, or new and old — have experienced their fair share of both positive and negative publicity. For example, Julian Robertson’s Tiger Funds drew attention to the potential pitfalls surrounding large, established funds, when after decades of successful performance, he shut down his flagship fund due in large part to the difficulties he encountered in managing his massive fund. On the other hand, smaller, younger funds like Integral Capital Management have made headlines for both operational and performance woes. This paper will attempt to examine the performance of hedge funds, classified into six size and age subcategories, to determine if any one group has a performance advantage over the others.
SUPERSIZE ME? In many areas, bigger is perceived as better. However, in hedge funds, the opposite seems
Derivatives Use, Trading & Regulation Volume 12 Number 4 2007 www.palgrave-journals.com/dutr
Derivatives Use, Trading & Regulation, Vol. 12 No. 4, 2007, pp. 342–350 r 2007 Palgrave Macmillan Ltd 1357-0927 $30.00
categorisation problematic. The sample of funds included in each of the three indices varied from month to month. On average, the small-sized index contained, 1,790.5 funds per month, whereas the medium-sized and large-sized indices contained 479.9 and 136.5 funds per month, respectively. In all three cases, the earlier monthly samples contained less funds than later samples. The three size-based indices that were created using this information are shown below in Figure 1. As the summary risk-reward tables below show, small funds clearly provide the best investment option, given that ‘best’ is simply defined as providing maximised returns. For example, the small funds index in our study provided an annualised return of 15.46 per c
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