14 March 2011

FN: Small is beautiful again in hedge funds

According to a survey of investors just published by Deutsche Bank, a large provider of financing for hedge funds, 65% of investors anticipated the average size of hedge funds to which they would allocate in 2011 would be under $1bn. This is in marked contrast to the 44% who are currently invested with funds larger than $1bn.

The report says that "as fears of some of those risks have subsided and some of the brand name managers failed to generate strong performance, investors have begun to focus on managers that have fewer assets. This move also represents an increased appreciation of the human aspect of investing, that is, knowing the manager they choose to run their money and having access to him, which is more readily granted by managers running smaller books. Furthermore, the healthy pipeline of new launch activity, including some very high profile, institutional quality new launches, has contributed to the trend towards looking at slightly smaller managers. Over 50% of investors will invest on day one, compared with only 20% in 2004. Seeding activity and the size of seed deals are expected to increase.”

Smaller managers are perceived to be more nimble and, as a result, to generate higher returns. According to research published by financial services company Investcorp last year, funds that were less than three years old outperformed their large rivals by more than 5% in 2008 and, during the first three years following inception, beat the rivals in their strategy by 1.3 percentage points a year.

Deutsche Bank's survey of 528 investors, who collectively have invested $1.3 trillion in hedge funds, also predicted that the hedge fund industry’s total assets would reach $2.25 trillion by the end of this year, a record amount. This is to be driven by inflows, which at $210bn would be four times the amount seen last year.

Full article (FN subscription needed)

© Financial News