Risk & Reward: Strategy: Outpacing the Herd
Small Is Beautiful
John Ferry
03/01/2006

Incremental Monthly Return Gained Versus Median Age Group Hedge Fund
Age (month)Return (%)
1 to 60.60
7 to 120.38
13 to 180.26
19 to 240.16
25 to 300.07
31 to 360.05
37 to 420
43 to 48-0.03
49 to 54-0.05
55 to 60-0.07
61 to 66-0.09
67 to 72-0.10
73 to 78-0.14
79 to 83-0.15
Little if any data exist that compare the performance of niche hedge funds to that of larger, mainstream funds. One reason is the debate over which funds operate in a niche and which ones are mainstream—few managers want to be tarred with the latter designation. However, studies have compared the performance of large, well-capitalized funds to their smaller counterparts, and others have compared new and old funds. In a 2003 academic paper by Vikas Agarwal and Naveen Daniel of Georgia State University and Narayan Naik of London Business School, the authors concluded that larger hedge funds have lower future returns. These funds also show good persistence of returns in the future, the authors found; this is consistent with the idea that there are decreasing returns to scale in the hedge fund industry.

Meanwhile, a 2001 report from analysts at Lehman Brothers suggests younger hedge funds outperform their older peers on average. The analysts compared the returns of funds of differing ages and found that funds that were between one and six months old outperformed funds in a median age group by 0.6 percent per month on average (see table). Unfortunately, these studies have not been updated, but the conclusions reached are probably still relevant—indeed perhaps more so given contemporary capacity constraints.

Source: Lazard, Tass/Tremont and HFR

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