Bigger is not Necessarily Better

Today, I focused on emerging private equity funds' outperformance versus larger, more established funds. But let's not forget about hedge funds. The same outperformance can also be found there.

First a multiple-choice question: whom do you want running your hedge fund?

A. A guy who's been running money for decades and has his wealth spread out across a big portfolio that may be worth more than yours may.

B. A guy who's sunk almost all his net worth into the fund, so he's trading his own money, and stays up at night thinking about how he's got to make the fund work or he'll lose his house.

Yes, there are merits to both. But for those of you who've selected choice B, you and emerging funds are a match made in heaven. Smaller, upstart funds tend to be more industry-focused, they tend to take risks and they tend to be hungrier. And that's why performance results reported by several sources reflect that competitive edge.

The data backs this up. According to VanthedgePoint Group, 2006 returns of emerging hedge fund managers were 16.74%. Compare that to the 11.76% advance on the Index and the S&P 500's gain of 13.62%. has also put together some stunning data. Between January 2003 and March 2007, funds with $50 million to $250 million under management saw cumulative average monthly returns north of 60% for that time period. Funds with more than $1 billion under management saw returns of 45%.

And, lastly, MayerCap performed its own study, tracking hedge funds started in 2003 and 2004, with assets between $30 million and $250 million. The finding: it is a sweet spot, in terms of returns.

For those of you who are now interested in investing, there are many fund of emerging hedge funds starting, who do the due diligence for you.

Questions? Comments?