Hedge fund incubator says size matters for hedge funds, and ‘small is good

Seeders and managers are advocating smaller funds as candidates for outperformance in the current markets, at a time the industry’s largest managers are handing back money to investors.

Jeroen Tielman, CEO and founder of hedge fund incubator IMQubator, highlighted research from data monitors PerTrac showing small funds with assets of under $100m have outperformed rivals holding over $500m in 13 of the last 16 years.

Additionally, funds started within two years of a measurement point had cumulative returns of 827% since 1996, far outpacing the 350% from funds that were more than four years old.

Tielman said emerging managers “deserve to be included by institutional investors in the core of their hedge fund exposure”.

“The present economic climate favours the quick and nimble and might punish the large, slow and cumbersome.” IMQ is itself proof pensions are taking such advice. It was capitalised in January 2009 with €250m from APG, the asset manager for Dutch pensions giant Stichting Pensioenfonds ABP.

Its advice comes as some of the largest pension funds have given back money to investors, citing capacity constraints and the danger of impairing returns if they continued growing.

Louis Bacon’s Moore Capital Management said it would return $2bn, or about 25% of the cash in his firm’s main hedge fund, to its rightful owners, so as not to damage the returns he could make on the rest of their commitment.

Brevan Howard has also returned some money to clients of its Master fund since the global crisis.

Bloomberg cited a letter from Moore Capital’s Bacon, explaining there were fewer opportunities and less liquidity in global markets, and in currency markets, government intervention meant the gap between the strongest and weakest G10 currency was as narrow as it had been since the early 1970s.

The problem of size is not confined to the hedge fund world.

When Stephen Thariyan, Henderson’s head of credit, presented the firm’s forthcoming high yield fund to investors earlier this month, he emphasised it would be capped at below €2bn assets.

“Some [credit] funds are €5bn or €8bn – which means a 1% position is €50m to €80m, and you cannot trade that. If one day you suddenly decide you do not like for example Peugeot, and want to trade a large position, you’re stuck.”

He said banks, which historically took sellers’ orders onto their own books to find a buyer, have cut their dealer inventory by 80% over four years, and have cut their internal trading desks, hitting liquidity further.

Thariyan said keeping assets at a manageable size was “the only way you can be sure to conserve the alpha”.



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