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Investors love hedge funds that are small, new and nimble. But more and more of their capital is going to Alpha's Hedge Fund 100.
The largest hedge fund firms and their investors have something of a love-hate relationship. On the one hand, the growing ranks of institutions pouring money into hedge funds and other alternative investments prefer firms with deep benches, solid infrastructure, sophisticated risk management and a large team of portfolio managers and analysts sleuthing for investments. On the other, investors are mindful of studies consistently suggesting that smaller, younger, even fledgling funds outperform bigger, older, more seasoned funds.
"Overall, large size is generally bad," says Michael Hennessy, director of investments at Morgan Creek Capital Management, a fund-of-hedge-funds firm based in Chapel Hill, North Carolina. "The industry started out as boutique-ish, and the subsequent significant increase in size and institutionalization -- as we have seen over and over -- is seldom a good thing. At the fund level it generally impedes nimbleness, flexibility, liquidity and results, depending upon the strategy."
Hennessy acknowledges that most big managers started off small. "The harsh, Darwinian nature of the business has resulted in some evolution of the fittest [firms], which are incredibly strong, skilled, well resourced and high performing," he says, noting that while Morgan Creek invests with some of these, most of its capital is invested outside the biggest firms that rank among the Hedge Fund 100.
Still, many institutional investors hold their noses and send a disproportionately large slice of their hedge fund allocations to the biggest funds. This reality is confirmed by our 13th annual Hedge Fund 100 ranking. At the start of 2014, the world's 100 largest hedge fund firms managed $1.51 trillion, up almost 14 percent from early 2013, when they had $1.33 trillion. Over the past two years, assets of the top 100 hedge fund firms have surged nearly 25 percent.
Industrywide, assets grew in 2013 by 9.7 percent, to $2.85 trillion, after rising 5.9 percent the previous year, according to Marietta, Georgia, data provider eVestment. The top 100 firms account for more than half of total industry assets, and their share has been increasing.
The rate of asset growth for the top 100 far exceeds the average of hedge funds...