Analysis: Small hedge funds top big ones in 2012 with strong returns

Thu Jan 17, 2013 1:33pm EST
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By Svea Herbst-Bayliss

BOSTON (Reuters) - In tough times, small hedge funds appear to have bested many of their bigger competitors.

As the industry digests another year of largely mediocre hedge fund returns, especially at many of the largest players, some investors are beginning to turn their sights toward smaller newcomers to deliver the kind of double-digit returns that made the industry famous.

Year-end performance numbers for 2012 are revealing a good number of industry stalwarts like Alan Howard's $34 billion Brevan Howard and David Einhorn's $8 billion Greenlight Capital fund that posted just single digit returns. John Paulson, another industry legend, had a mixed year with single digit gains in two funds, double digit gains in the Paulson Enhanced fund but double digit losses in the Advantage funds.

Overall, the average hedge fund in the $2 trillion industry gained just 6 percent, well below the 13 percent gain for the broader U.S. stock market.

With academic research finding that small funds often outperform multi-billion dollar portfolios, some investors are redoubling efforts to find the next industry star among the startups.


Analytics firm PerTrac recently reported that funds with less than $100 million in assets have outperformed much larger funds in 13 out of the last 16 years.

"We are seeing a lot more interest today in smaller funds than in the last few years," said Ted Seides who specializes in reviewing established small and select emerging managers as co-chief investment officer at Protege Partners. "Finding the right small hedge funds affords investors a wonderful opportunity to earn returns that meet return objectives and that generate risk‐adjusted returns that are among the highest available in the capital markets," he added.   Continued...