It is the newest hedge fund managers that deliver the most spectacular returns. At least according to a New York Times account of a study by Mayer & Hoffman Capital Advisors, a fund of funds group that specializes in new and emerging hedge fund managers. The study of two calendar years 2004 and 2005 found that emerging hedge fund managers running $30-250 million in assets outperformed the hedge fund indices.
The study, prepared by Sam Kirschner and Ron Panzier for Mayer & Hoffman, found new managers returned 45% more in term of total return the Morgan Stanley Capital International noninvestable equal-weighted hedge fund index, and more than double the returns of the Credit Suisse/Tremont investable index.
Though the report concedes that starting from a lower base without the drag of too many funds makes spectacular returns easier, it also suggests that entrepreneurial energy counts as well, especially since the fees are performance-related. However, the finding matches evidence on the long-only side, where performance fees are not generally a factor.
According to the study, 167 managers measured on an equal-weighted basis returned 11.39 percent in 2004, compared with the MSCI equal-weighted index, at 6.55 percent, and the Credit Suisse/Tremont investable index, at 5.31 percent.
In 2005, again on an equal-weighted basis, they delivered returns of 9.55 percent, compared with 8.20 percent for the MSCI hedge fund index and 3.60 percent for the Credit Suisse/Tremont index.
The data is distorted to some extent by survivorship bias, continues the report, noting an average hedge fund life of only 2.7 years. But Mayer & Hoffman say only 2 of the 167 funds closed at the end of 2004, followed by another 12 in 2005 a total failure rate of 8.4 percent, in line with the median hedge fund attrition rate measured by the four major indices of 8.1 percent.