Whether you know it or not, right now Wall Street is in the midst of a hedge fund data dump, as everyone from banks to research firms release their 2013 reports on the industry.
For the most part, things don’t change — despite a fairly dismal average returns in 2013 (9.8%) investors will continue to increase or maintain their allocations to hedge funds, according to a report by research firm Preqin. They’re comfortable with the fee structure, and they plan on sticking to strategies that worked through 2013, like activist and long/short.
That’s pretty standard stuff, but their report also pointed out something very different.
Prequin’s report showed that investors are more willing to allocate their capital to firms with between $US1-$5 billion assets under management (AUM) or $US100-$499 million under management.
What that means is, ladies and gentleman, the little guys could get a shot.
Business Insider has reported time and time again that the bar to start a hedge fund has been raised over the last decade. It’s hard to go to investors with less than $US50 million assets under management and attract sticky money from institutional investors like pension funds.
So when we’re talking about funds with $US100 to $US499 million AUM, we’re talking about funds that could be relatively new to the game.
The names that we hear on financial TV over and over again have way more that $US5 billion AUM. Think: Bill Ackman has around $US12 billion under management at Pershing Square, Carl Icahn has almost $7 billion in his investment funds, and then of course there’s Ray Dalio and Bridgewater with $US127 billion AUM.
They are the kings, and their size and reputation helps to keep them on the throne.
It seems, though, that investors are willing to take a chance on something different in 2014. In fact, they think that large size could actually be a bad thing. The market is going to be choppier — we’ve already seen that — and according to Prequin’s respondents, most investors that are looking for smaller funds that are able to deal with the market’s curveballs.
Plus they’re cheaper.
“These managers are often better placed to take advantage of a wider opportunity set due to their smaller position sizes and more than half (52%) of investors targeting smaller managers cited their nimbleness as a key characteristic,” said the report. “One UK-based investment company stated “smaller managers on the whole tend to be more nimble and less concerned with accumulating management fees than the larger managers”, and, overall, 19% of investors said they prefer investing with smaller managers due to these firms offering more attractive fund terms.”
Of course, there’s still something to be said for reputation and experience, as you’ll see in the chart below, breaking down why investors look prefer larger or smaller hedge funds.
All that said, if you’re a smaller fund, now’s the time to get the word out about what you’re doing right. You may catch some big clients that could put you in the big leagues. If that’s where you want to be now, of course.
Check out Prequin’s data in the chart below:
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