Young hedge funds make best returns

Date: Thursday, April 27, 2006
Author: Tom Burroughes- Reuters.co.uk

By Tom Burroughes AMSTERDAM (Reuters) - Hedge funds within the first two years of doing business tend to chalk up higher returns than older funds, which is a key factor for clients to watch, a senior industry figure said on Wednesday. "There does seem to be some evidence that if you invest in younger hedge funds out there, you will get a better return than in more established hedge funds," Stephen Oxley, managing director of Pacific Alternative Asset Management Co., told an IQPC conference. Hedge funds less than two years old delivered an annualized return over 10 years to December 2004 of 16.91 percent compared with 6.38 percent all funds in the universe of portfolios tracked by Hedge Fund Research (HFR), Oxley said. "The gap is still significant even after taking account of the failure rate of start-ups, a factor known as survivor bias." Over five years, annualized returns for funds under two years old were 11.13 percent compared with overall returns over the same period of 5.17 percent, the HFR data showed. Investors are more closely scrutinising hedge fund returns, after average returns dropped in 2004 and 2005, although they have recovered in the past few months. Pension schemes, attracted by the ability of these vehicles to make money in all markets, have poured money into hedge funds, lifting total assets to more than $1 trillion (560 billion pounds) last year. The sector is projected to surpass $2 trillion by the end of the decade. YOUNG AND HUNGRY Hedge funds typically charge management fees of up to 2 percent of assets and performance fees of up to 20 percent of any returns beyond preset targets, but clients can often negotiate lower prices with a start-up eager to get off the ground, Oxley said. "We usually try to negotiate performance fees down," he said, although he declined to give exact figures. Young funds tend to perform better, because their managers are keen to make money and establish a brand, are more nimble and able to hunt for market opportunities, and can be more flexible in adopting new ideas, he said. Older funds often lose momentum, in some cases because their founders become complacent or lose motivation, Oxley said, although he said many older firms still perform well. "There are huge incentives for these (start-up) fund managers to consider. They are going to work harder and be hungry. That entrepreneurial element to these funds is important." There are about 8,000 hedge funds worldwide. On average, these businesses last for about 6.5 years, and their lifespan has shortened slightly in recent years, Jurcell Virginia, principal at AIG Specialist Consultants, told the conference. Hedge fund returns for all strategies rose by an average of around 5.5 percent in the three months to the end of March this year, compared with 7.5 percent for the whole of 2005, according to latest industry data.