New Managers February 2012

Perspectives
Recent research, surveys and views on emerging managers

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Study: Smaller funds and younger funds outperform their peers

According to a recent study, hedge funds with greater managerial incentives, smaller funds and younger funds outperform their peers, while hedge funds with strict share restrictions are not associated with higher risk-adjusted returns. It also showed that using a consolidated database will help researchers avoid biases.

The study, "Revisiting 'Stylized Facts' About Hedge Funds - Insights from a Novel Aggregation of the Main Hedge Fund Databases," by Juha Joenvaara and Pekka Tolonen of the University of Oulu (Finland) and Robert Kosowski of Imperial College Business School (London), aims to present stylised facts about hedge fund performance and data biases based on a new database aggregation - stylized facts being simplified presentations of empirical findings.

The study's objective is to help hedge fund researchers when they compare results across different studies by highlighting differences between databases and "their effect on previously documented results."

The study used a comprehensive hedge fund database and documented "economically important positive" risk-adjusted performance of the average fund "while differences in magnitude are due to differences in fund size and data biases, but not differences in fund risk exposures."

As this performance does not stick with any of the databases when using value-weighted returns, the analysts show this is tied to fund size and bigger biases in certain databases. (A value-weighted market return is a weighted average of all stock returns, with the weights given by the market value of the stock issue at the end......................

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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.