* Bigger hedge funds are less nimble-new research
* Bigger hedge funds returns likely to lag-research
BOSTON Nov 11 Contrary to conventional wisdom,
bigger may actually not be better when it comes to investing
with hedge funds.
At least that is what fund manager Jason Orchard and
Fordham University accounting professor Haim Mozes found,
arguing in a paper that big funds are less nimble than smaller
ones and that returns will eventually lag and prompt investors
to exit. The paper was released on Thursday.
"The opportunity costs of investing in large funds may be
higher and the safety benefit of investing in large funds may
be lower than investors currently expect," said Orchard, a
principal at New York-based hedge fund Spring Mountain
Big hedge funds are more likely than smaller hedge funds to
either go out of business or to restrict investors from getting
all of their money back when they want, the authors wrote.
The findings stand in stark contrast to conventional wisdom
that large hedge funds are better able to withstand market
turmoil by hiring top analysts and having enough cash to meet
Recent data from industry magazine AR illustrate investors'
preference for big funds, finding that fund firms with more
than $5 billion of assets saw assets climb 1 percent during the
first half of 2010. Among funds with assets between $1 billion
and $ billion, half said their asset levels either dropped or
There are thousands of hedge funds operating around the
world, but more than half of the industry's roughly $1.6
trillion in assets is managed by large funds like Bridgewater
Associates, D.E. Shaw Group, Paulson & Co. and Baupost Group.
The authors describe a vicious circle where returns
eventually drop off and investors realize the fund has capacity
"At that point, as the fund's assets may be bid too high
and it may be managing more assets under management than it is
capable of effectively managing, either the fund takes
excessive risk in an attempt to maintain returns or investors
become disappointed and redemption requests accumulate," the
Indeed some of the industry's canniest managers have been
known to return money to investors if they find they have grown
too large and can't find new investment opportunities. This
week Baupost's Seth Klarman, for example, told investors that
the $23 billion fund will return 5 percent of its capital at
the end of the year.
The authors said they based their findings on 7,545 still
active and 8,916 shuttered funds, respectively, from 1995
through May 2010.
(Reporting by Svea Herbst-Bayliss; Editing by Steve Orlofsky)