Are The Best Hedge Funds The Oldest?

In a recent report, analysts at eVestment Alternatives Research look into the impact of hedge funds’ size and age on their performance. According to the note:

• The relative number of small hedge funds (with less than $250 million of assets under management) is falling across the industry, while investors’ interest in medium (between $250 million and $1 billion in AUM) and large (more than $1 billion in AUM) firms seems to be increasing. These last two groups concentrate the “largest share of the reporting industry to date.”
• “The tendency for smaller funds to outperform has declined. By average annual returns, the dominant outperformance streak of small hedge funds ceased in 2009 and has been inconsistent since.”
• As the industry continues to mature, tenured funds dominate. By January 2014, their percentage share of the universe reached 56.64.
• Age seems to be more relevant for relative performance than size. Young funds, with less than 2 years of existence, retrieved the highest cumulative returns since 2003. Moreover, they have outperformed mid-age (2-5 years old) and tenured (more than 5 years old) funds over the past 5 years.

The Age Universe

Since age seems to be more important for performance than size, let’s take a look at some data.

• In every year – but 2013, young funds had, in average, higher returns than the average mid-age and tenured funds.
• Since 2013, mid-age and tenured funds have been outperforming one another, going back and forward. According to the report, “By average returns, the split was 50/50; by median returns, the mid-age fund has two additional years in its favor.”
• Tenured funds tend to be the most volatile. Therefore, the experts conclude that performance volatility seems to rise with age. This means the annualized standard deviations for tenured funds are usually the highest.
• Annualized risk-adjusted performance tends to diminish with the years. The report expounds, “The average tenured fund only outperformed the average mid-age in 2009, and the average mid-age only outperformed the young in 2012. By median returns, young funds always exhibited higher Sharpe ratios and the mid-age outperformed the large in 9 of 12 periods.”
• Average young funds have also tended to outperformed mid-age and tenured funds, on an annualized trailing basis – 36 months. On a median returns basis, tenured funds have tended to deliver better results than mid-age and young funds.
• When trailing periods are extended, young funds tend to outperform their older peers.