Predictions for 2016: Outperformance from small managers, more closures and pressure on fees

In their2016 prediction for the hedge fund industry, Agecroft Partners, a US-based hedge fund marketing firm, said that smaller managers would outperform. "While many studies have shown stronger performance by younger and smaller funds, the 2016 landscape should provide a particularly attractive environment for smaller hedge funds. In moving to a performance environment increasingly dependent on alpha, security selection becomes even more important, especially in less efficient markets where smaller managers have a distinct advantage. Since 2009 there has been a high concentration of hedge fund investment flows to the largest managers with the strongest brands. This has caused many of these managers' assets to swell well past the optimal asset level to maximize returns for their investors. As they become larger, it is increasingly difficult for large, multi-billion dollar funds to add value through security selection. Additionally, large fund managers are often stewards of capital for many large pension clients and thought of as 'safe hands' by risk adverse investment committees. They have an incentive to reduce risk in their portfolio in order to maintain assets and thereby increase the probability of continuing to collect large management fees."

Agecroft also expects continued pressure on fees, and more hedge funds shutting down: "Hedge funds will shut down at an increased pace driven by four factors: 1) the current number of hedge funds is near an all-time high of 15,000. Given a consistent rate for hedge funds ceasing operations, hedge fund closures should also be at an all-time high. 2) This increase in the number of hedge fund managers has reduced the average quality of hedge funds in the industry. Many of the lower quality managers will experience a higher rate of closing down, which is good for the industry. 3) Increased vo......................

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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.