Large Hedge Funds Have Outperformed This Year. So What?

Don’t give up on small funds. They’ve still outperformed in 20 of the last 25 years.

Illustration by II

Illustration by II

A quick look at some of the well-publicized data on hedge funds shows that the largest funds are turning in the best returns this year. While true, a deeper dive into the numbers paints a far more nuanced picture for investors. In fact, investors shouldn’t conclude too much from what’s happening in 2022. Little has changed about the historical outperformance of smaller funds.

Jon Caplis, CEO and founder of hedge fund research and analytics firm PivotalPath, says an analysis of medium-term trend-following strategies illustrates what’s lost when only the top-line numbers are taken into account. Managed futures hedge funds and global macro were the best performing categories in September, returning 4 percent and 1.8 percent, respectively, for the month. For the year through September, the two categories were up 21 percent and 12.5 percent, respectively.

But managed futures that focus on medium-term trend-following strategies — essentially the top quartile of funds — have returned 42.6 percent on an annualized basis in 2022. That’s almost double the 22.1 percent return of the bottom quartile of funds, which generally focus on shorter-term trading strategies that haven’t performed as well. How do you judge an unusual, perhaps wild, year? One way is to look at the gap between the top and bottom quartiles. That spread is 20.5 percent on an annualized basis for 2022, double the average dispersion between 2010 and 2021.

What’s the difference? The benefits of scale.

“By design, if you’re a $10 billion CTA, you have to be predominantly trend following. That strategy scales, so it attracts larger managers who are often restricted from shorter-term trading strategies, at least as a meaningful part of their portfolio, which this year are not performing nearly as well,” said Caplis.


Although Caplis declined to comment on individual hedge fund names, the headlines have been punctuated by outperforming behemoths such as AHL Man, Aspect, Winton, and Transtrend.

Global macro, including global macro quant, is similar: Managers that have performed better are the ones using more trend strategies, which, again, benefit from scale.

The list goes on. Multi-strategy — think of mega firms like Citadel, Balyasny, D.E. Shaw, and Millennium — are also performing well on a relative basis this year, with PivotalPath’s multi-strat index down 0.4 percent this year through September. Caplis said the best-performing funds over the last five years have been the larger funds that can afford to hire the best talent and build complex systems to manage the overall portfolio’s risk. “There is a significant barrier to succeed in this strategy without critical mass,” he said. (Technically, multi-strategy is actually having one of its worst years, but most investors are relieved to be flat to down slightly.)

The pain crypto has inflicted on smaller hedge funds this year is also considerable. Bitcoin alone is down 65 percent through September. “A lot of small managers in the space that generated significant returns in 2019-2021 are performing poorly in 2022,” said Caplis.

So back to normal years and the smaller funds beating the big guys.

When investors compare PivotalPath’s asset-weighted composite — which gives larger funds more weight — to its equal-weighted composite, in which every fund is equal regardless of size, equal weight has outperformed every year since 1998, with the exception of 2002, 2008, 2011, and 2018. That means that small funds outperformed in 20 of 24 years prior to 2022. And those four unusual years in which small funds didn’t outperform included the bear market after the technology bubble burst and the global financial crisis.

This year, larger funds are outperforming by 1.9 percent through September, which amounts to the largest outperformance, by calendar year, on record. The second largest came in 2008, when there was an outperformance of 1.3 percent. The equal-weight index has generated 10.8 percent annualized from January 1998 through December 2021, while the asset-weighted composite has had an annualized performance of 10 percent.