Related News:
Large Hedge Funds Are Riskier Than Perceived, Spring Mountain Capital Says
Investors who believe larger hedge funds offer more safety and better returns than their smaller rivals may be misguided, according to Spring Mountain Capital LP.
Funds with more than $1.5 billion in assets generate an average of 0.2 percent a month less in alpha, or returns above market indexes, than smaller managers, the New York-based investment management firm said today in a report. Spring Mountain analyzed 7,545 existing and 8,916 closed funds from 1995 through this May.
“The supply of the illiquid securities you need to generate alpha is finite -- large funds can’t get enough of them,” Haim Mozes, a senior consultant at the company and co- author of the report, said in a telephone interview. “When a fund gets very large their ability to honor redemptions gets impaired.”
Several big hedge funds imposed liquidation restrictions in 2007 and 2008, while small funds tended to be “the ATM machines for investors,” according to Jason Orchard, principal at Spring Mountain who co-wrote the report. About $77 billion in assets that were frozen during the credit crisis were still restricted as of January, according to Credit Suisse Tremont Index LLC. D.E. Shaw & Co., Highland Capital Management LP and Harbinger Capital Partners LLC were among the firms to limit withdrawals.
About 75 percent of the $19 billion in client deposits to hedge funds went to managers of $5 billion or more in the third quarter, according to Chicago-based Hedge Fund Research Inc.
‘Redemption Cycle’
“Eventually, fund size will hinder performance enough to trigger a redemption cycle that has a strong negative feedback loop,” according to the authors.
Smaller funds are usually better able to exploit market volatility, while bigger managers provide more beta, or performance in line with benchmark indexes, they said.
Mozes and Orchard declined to say whether Spring Mountain, which manages $2 billion in client assets, has pared its investments in large hedge funds.
Hedge funds are lightly regulated pools of capital whose managers can invest in any asset, and share in annual profits.
To contact the reporter on this story: Kelly Bit in New York at kbit@bloomberg.net
To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net
Rate These Stories
Rate this Page