For Hedge Funds, Bigger Is Always Better

Hedge funds with assets-under-management of less than US$100 million posted the lowest returns and had the highest volatility compared to funds managing more assets, according to the results of a new study released by Preqin.

In contrary, hedge funds with asset-under-management of US$1 billion or more posted the greatest returns with the lowest volatility.

As of the end of August, hedge funds with US$1 billion or more returned -1.49% for the month and 4.3% during the prior 12 months.

They did much better in the long term. For the past three year and five year, they posted annualized returns of 9.06% and 8.52%, respectively.

Large funds also achieved the highest returns with the lowest three-year volatility, of only 3.29%.

Smaller funds have less attractive risk-return profiles. As a compensation, they offer investors better terms.

Emerging funds charge an average of 1.55% management fee and 18.84% performance fee, respectively. For large funds, the numbers are 1.63% and 19.70%, respectively.

Smaller funds also provides better liquidity options for limited partners. The average redemption frequency for large funds is 104 days, more than twice the average of 51 days for emerging funds.

Prqin defines emerging funds as those with less than US$100 million. Small funds manages between US$100 million to US$499 million, while medium funds manages between US$500 million to US$999 million. Large funds manages over US$1 billion.

In terms of total assets-under-management, large funds dominate the industry globally. Large funds comprise only 9% of the total number of funds, but manage 82% of capital. In contrast, small and emerging funds, which total 85% of hedge fund numbers, only manage 11% of the industry’s total assets.