BOSTON, Nov 27 (Reuters) - Wealthy investors may get more bang for their buck if they invest with brand new hedge fund managers, but they must also have a strong stomach to tolerate potential losses, a study released on Wednesday shows.
Data from research firm Preqin shows that the average new hedge fund manager who set up a firm within the last six years delivered average annualized returns of 8.80 percent in the first three years of trading.
That compares with a gain of 5.38 percent for the new funds launched by established firms.
This year the average hedge fund has gained only about 6 percent, according to Hedge Fund Research, while the Standard & Poor's 500 index is up 27 percent.
"Our data show that as an investor you can generate outperformance by putting money with brand new managers if you can tolerate the risk that goes along with it," said Tim Friedman, head of U.S. operations at Preqin.
One fifth of new managers suffered losses in their first year of trading and those losses tended to be steeper than declines at other funds, the Preqin survey showed.
"You have to put skin in the game as a new fund manager and show that your interests are truly aligned with the investors," Friedman said, explaining that new managers often take bigger risks which can explain the greater gains - or losses.
With banks curbing their proprietary trading operations and more junior partners at established funds itching to launch their own firms, the number of new launches has never been bigger. To date this year 231 new funds have already launched, putting 2013 on track to best 2012's 274 new launches.
So far this year, Richard Schimel, who once ran Diamondback, has launched his new firm Sterling Ridge and Michael Pausic, a Maverick Capital alumnus, launched Foxhaven Capital Fund. Also Hari Ramanan and Adam Ryan are spinning out of Eminence Capital with their own fund.
Despite the increased choice, investors are now more nervous about taking the plunge with a newcomer as Preqin data show only 38 percent of investors are interested in first-time funds, down from 42 percent a year ago.
"It can be a big risk to commit to potential future stars," Friedman said, noting that most big institutional investors still insist on a three year track record.
Investors like pension funds are far more likely to invest with a small manager than one who doesn't have a long track record, the data show, with 75 percent of the investors polled by Preqin saying they would put money with funds that have less than $500 million in assets.