Large hedge funds, which represent a large majority of institutional capital allocated to the sector, outperform their small counterparts, according to a new report from Preqin, the alternatives data provider.
Despite a loss of 1.5% in August, funds with $1 billion or more in assets under management have generated a 12-month return of 4.3%, a three-year annualized return of 9.1% and a five-year annualized return of 8.5%. They also had the lowest three-year volatility of any size class, only 3.3%. Their Sharpe ratio was 2.84.
In contrast, hedge funds with less than $100 million in assets had the lowest returns across all timeframes, as well as the highest volatility.
These findings are significant, as 82% of institutional capital allocated to hedge funds today is invested in large vehicles, according to Preqin. Small and emerging funds, those with less than $500 million in assets, have only 11% of capital commitments.
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The findings were derived on Preqin’s recently released fund size benchmarks, which assess the performance of hedge funds based on asset size.
Preqin noted that big funds were successful because they had built up their asset bases over an average of 12 years. Early on, they were able to stand out from their peers with strong performance, eliciting capital commitments from investors that enabled them to thrive.
Still, only 11% of investors are willing to allocate exclusively to the biggest funds, according to Preqin. Smaller funds appeal to allocators for several reasons.