Credit Suisse's 2014 hedge fund investor survey showed only a third of respondents would invest in a fund under $50 million, while just over half could invest in one between $50 million and $100 million and three-quarters could do so in one over $100 million.
New rules, new players?
Small hedge funds seeking to attract institutional investors have also suffered a loss of support from some of their traditional backers, investment banks, following the introduction of new regulations.
Tighter rules demanding that banks have higher levels of capital to protect against risk have resulted in their prime brokerage units, which provide services like financing and stock lending to hedge funds, becoming more cautious.
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"We have to be a lot more certain of ourselves that these guys are the ones that are going to grow, and it may take 3, 4 or 5 years for them to grow into a customer that's meaningful," said a hedge fund consultant at a leading investment bank.
"If you're less than $100 million, a pension fund may love your return profile but say 'I can only write you $10 million and you're at $80 million, come back when you've raised another $20 million," he said.
But while regulation may be hampering the growth of some small funds, other post-crisis regulation like the Volcker Rule—which stops U.S. banks from trading on their own account—may yet boost young funds.
There has been a significant increase in the number of investment banks spinning off hedge funds made up of their trading teams, says Jonathan de Lance-Holmes, partner at legal firm Linklaters, "and there's a lot more to come."