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Alternative Market Briefing

Investors are better off investing in small hedge funds in times of crisis

Monday, July 20, 2015

Benedicte Gravrand, Opalesque Geneva for New Managers:

A paper released this month finds that there is a strong, negative relationship between hedge fund performance and size.

Andrew Clare, Dirk Nitzsche and Nick Motson from the Sir John Cass Business School in London used a more comprehensive dataset than previous authors in this area, they say, to revisit the relationship between hedge fund performance and size.

In their paper called Are investors better off with small hedge funds in times of crisis?, they claim that they also found that in the last 20 years, and through the two recent financial crises (the collapse of the high tech bubble and the more recent global financial crisis), investors would have gained more with smaller hedge funds than with large ones.

They tested the hypotheses that capacity constraints and associated diseconomies of scale are more likely to be found in the hedge fund industry than the mutual funds industry. This is because hedge fund managers employ highly focused strategies, use leverage, invest in illiquid assets, concentrate on specific market segments and use complex derivatives.

They used the TASS database of more than 7,000 funds, with data spanning the period between 1994 and 2014.

The largest decile of hedge funds in 1994 had an average......................

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