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Impact of Fund Size and Age on Hedge Fund Performance

According to a recent study published by PerTrac, small hedge funds outperform mid-size and large funds, and young funds outperform older funds. The small hedge funds with less than $100 million in assets under management had an average return of 13.04% compared to 11.14% posted by mid-size funds ($100 million to $500 million in assets under management) and 10.99% returns for funds with more than $500 million. This trend also continued for the first six months of 2011. Their research also discovered that younger hedge funds (less than two years old) gained 13.25% last year, against 12.65% for funds two to four years old and 11.77% for funds older than 4 years old. In addition, the young funds appear to achieve these performances with less risk than their older counterparts.

Pertrac suggests several reasons why younger hedge funds outperform their older counterparts:

Smaller funds tend to have a more entrepreneurial, less bureaucratic decision‐making process than a larger one. A smaller manager can also take more meaningful positions in a broader range of instruments, market capitalizations and sectors without suffering liquidity constraints. The managers of small funds are generally newer managers who are highly incentivized to generate returns. Managers of large funds have a higher degree of risk aversion than the managers of smaller funds. The manager of smaller fund wants to develop a reputation in his early years that will allow them to grow the business into a sustainable long‐term operation while larger fund’s managers are more concerned about maintaining the franchise of the business .Managers of smaller funds can make changes in their portfolio more quickly than the larger ones, they have also lower fixed costs. On the other hand, new technologies may enable them to carry out their activities more efficiently as well.