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New Managers March 2013

Guest Article - Does size (of a hedge fund) matter?

What is the role of size in a hedge fund? For decades, academics and professionals have been trying to find the optimal ratio of assets to performance. We will try to animate the debate and to answer to this multiple-choice question in a simple and empirical way.

The main objective is to find out at which point a portfolio manager is too small with the risk of not having the right infrastructure and the necessary network, and when another portfolio manager is getting too big, and perhaps too rich, to still maintain the motivation needed to generate outsized performance rather than just charging heavy management commission.

One might have noticed in the recent Forbes ranking the list of estimated revenues of the world's biggest hedge funds managers. If some of them have clearly earned their money thanks to their trading or investing skills, others have just collected big management fees only thanks to their past relative to the performance they actually have generated. Those ones are "fat and happy" and live on their reputation. Others have made a choice to target institutional assets seeking to adapt their business and investment strategies to serve a broader range of investors. This is to the detriment of absolute performance and potentially changing investment style with a bigger allocation to liquid assets (indices, treasury bonds, sovereign currency G10, or even G3), or, on the contrary, to less liquid ones like private equity.

Some observers saw the legendary Moore Capital giving back capital to its clients under the simple but good reason that given the current market conditions (politically manipulated with chronicle issues and recurring sovereign risk), the size becomes a handicap to navigate efficiently within very noisy markets without a stable trend.

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This article was published in Opalesque's New Managers a top-down monthly analysis, news and research publication on the global emerging manager space.
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