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31 Mar 2009

Hedge Funds Size/Performance, Crisis Analysis

West Palm Beach ( - A recent paper by AlternativeSoft regarding the influence of hedge fund size and strategy during the recent crisis, showed that that from July to December 2008, large and medium hedge funds outperformed their smaller peers in terms of returns; also large hedge funds outperformed smaller hedge funds in term of Sharpe ratio.

The study was done using the AlternativeSoft software platform, enabling the group to quickly run statistics on individual funds, as well as on a group of hedge funds.

Looking at CTA strategies, Equity Long-Short, Macro and Multi-Strategies, AlternativeSoft found that from July to December 2008, medium sized hedge funds using CTA, Equity Long-Short and Multi-Strategy performed the best; however the large sized funds had the best Sharpe Ratio. This indicates that the medium sized hedge funds were exposing themselves to slightly more risk (assuming risk is defined with volatility only). In Macro, the large funds had higher returns and larger Sharpe ratio than smaller funds.

In conclusion, the analysis found that the larger funds performed better than their smaller peers, occurring because larger funds were able to better manage risk than smaller funds. In addition, the larger funds had more experience as shown below with a longer track record history. So experience matters when crash comes.

The average track record for a hedge fund is:
Small, 66 months
Medium, 78 months
Large, 91 months
Super Large, 139 months

A basic strategy investing in the 10 Super Large hedge funds mixed with large hedge funds ($500m), would have easily outperformed the hedge fund indices and other smaller hedge funds, in term of returns and Sharpe ratio during 2008.

Hedge funds with assets over $10 million and funds of hedge funds were not included in the study. December 2008 data were not available for all funds. In the ‘Super-large’ group, two hedge funds had large returns, which may skew the results. AlternativeSoft intentionally does not use statistical measures like R-squared, t-statistics or Granger causality in order to keep the paper readable.