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| Risk & Reward: Strategy: Outpacing the Herd |
Small Is Beautiful
John Ferry
03/01/2006
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| Incremental Monthly Return Gained Versus Median Age Group Hedge Fund | | Age (month) | Return (%) | | 1 to 6 | 0.60 | | 7 to 12 | 0.38 | | 13 to 18 | 0.26 | | 19 to 24 | 0.16 | | 25 to 30 | 0.07 | | 31 to 36 | 0.05 | | 37 to 42 | 0 | | 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
 Back to Main Article: Outpacing the Herd
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