Zurich, Switzerland (PRWEB) March 4, 2009
Large hedge funds have outperformed smaller hedge funds in 2008, according to AlternativeSoft.
2008 will be remembered as the year that transformed the financial sector, the traditional side of the industry lost many of its key players; size did not matter, numerous companies whether they were big or small were bought to their knees. In this article, an analysis of the hedge fund 2008 returns is performed, in particular the influence of hedge fund size and strategy on the fund performance. This analysis utilises the AlternativeSoft software platform to run statistics on individual funds, as well as on a group of hedge funds. In order to keep this article readable, no statistical measures like R2 or t-statistics are used, but only returns and volatilities.
The hedge fund universe is divided into four groups of different asset under management (AUM) sizes:
AUM range Average
(USD m) AUM Number of funds
Small 10-100 35.13 2'279
Medium 101-500 235.38 760
Large 500+ 700.31 202
Super Large 10 largest 6'559 10
Source: AlternativeSoft, hedgefund.net database
During the 2008 crash (i.e. from July to December 2008), large and medium hedge funds outperformed their smaller peers in terms of returns. Also large hedge funds outperform smaller hedge funds in term of Sharpe ratio.
In this first section, hedge fund performance will be investigated. During 2008, the Super Large hedge funds outperform the other funds on average by 12.43%. To put this into perspective, analysing returns over 2008 for each individual group, it becomes apparent that the Super Large hedge funds (-0.35% in 2008) on average outperforms Large (-7.75% in 2008), Medium (-9.26% in 2008) and Small (-14.43% in 2008). These results provide evidence that the Super Large hedge funds performed better than its smaller peers in 2008. However in order to really check whether these returns were due to smart investment decisions or to excess risk, the Sharpe Ratio will be considered. Calculating the average Sharpe ratio in each group, the following results are obtained:
Super Large 1.23
Source: AlternativeSoft, hedgefund.net database, 2% risk free rate, Jan08-Dec08.
From above, it becomes clear that the risk-adjusted performance of larger funds is better than that of smaller funds. Thus in 2008 the performances of Super Large hedge funds relative to its smaller peers were better in terms of both returns and Sharpe ratio.
In this second section, having already analysed the effects of size, the relationship between hedge fund strategy, size and 2008 returns is investigated. To simplify the analysis the four most popular strategies only are examined:
- Equity Long-Short
The year will be looked at in two parts: January to December 2008 and July to December 2008. This will provide a rational approach to comparing and contrasting between the performance during the entire year and the performance during the financial crash at the end of 2008. The table below shows the results. The Super Large group is not included as there are not enough funds per strategy to provide meaningful results.
AUM Jul-Dec08 Jan-Dec08 Sharpe Ratio
CTA (USD m)
Small 31.54 4.03% 19.58% 0.68
Medium 243.07 7.15% 21.73% 0.81
Large 732.86 7.06% 21.69% 1.00
Small 34.22 -17.74% -19.81% 0.32
Medium 227.41 -14.77% -15.75% 0.70
Large 693.33 -15.22% -13.27% 0.79
Small 32.78 -6.05% -2.89% 0.48
Medium 266.44 -8.04% -4.56% 0.83
Large 736.00 4.74% 15.14% 1.36
Small 36.43 -16.16% -15.85% 0.56
Medium 232.80 -14.90% -13.74% 0.51
Large 653.81 -17.17% -15.15% 0.98
Source: AlternativeSoft, hedgefund.net database, 2% risk free rate.
From July to December 2008, in CTA, Equity Long-Short and Multi-Strategy, the medium sized hedge funds performed the best; however for each of them the large sized funds had the best Sharpe Ratio. This indicates that the medium sized hedge funds were exposing themselves to slightly more risk (assuming risk is defined with volatility only). In Macro, the large funds had higher returns and larger Sharpe ratio than smaller funds.
In this paper, the performance of hedge funds in 2008 was investigated. The analysis found that the larger funds performed better than its smaller peers. The main reason why this occurred is because larger funds were able to better manage risk than smaller funds. This was shown by the fact that the Sharpe ratios for the larger funds were higher than the smaller funds. In addition, the larger funds had more experience as shown below with a longer track record history. So experience matters when crash comes.
Average Track Record
Small 66 months
Medium 78 months
Large 91 months
Super Large 139 months
A basic strategy investing in the 10 Super Large hedge funds mixed with large hedge funds (>USD500m), would have easily outperformed the hedge fund indices and other smaller hedge funds, in term of returns and Sharpe ratio during 2008.
Funds with assets <USD10 millions were not considered. Funds of Hedge Funds were not included in the study. December 2008 data were not available for all funds. In the 'Super-large group, two hedge funds had large returns, which may skew the results. We intentionally do not use statistical measures like R-squared, t-statistics or Granger causality in order to keep the paper readable.