This Year’s Surprising Hedge Fund Winners

Hedge fund strategies that outperformed in 2022 required significant investment in modeling and infrastructure.

Chris Ratcliffe/Bloomberg

Chris Ratcliffe/Bloomberg

Smaller funds, which can invest in niche areas of the market and stick to only their best ideas, often beat their larger peers.

In some hedge fund strategies, however, larger funds have significantly outperformed the smaller ones amid the current market downturn. Take managed futures, for example. According to data that Nasdaq’s eVestment pulled for Institutional Investor, the 30 smallest managed futures funds delivered an average return of only 4 basis points from January to August. Meanwhile, the 30 largest funds in the same category gained an astonishing 20.4 percent.

Larger hedge funds also outperformed — or at least protected capital better — in the multi-strategy and fixed-income categories, according to Peter Laurelli, global head of research at eVestment. The ten largest multi-strategy funds lost 2.1 percent year-to-date, significantly better than the entire group’s loss of 3.4 percent. The ten largest fixed-income funds lost an average of 1.5 percent in 2022, beating the entire group by 4 percentage points.

In general, hedge funds ranked in the top quartile by assets have demonstrated a meaningful outperformance compared to those in the bottom quartile. The former group lost an average of 1.3 percent year-to-date, while the latter lost 6 percent, according to eVestment.

Research shows that managers of smaller funds often generate higher returns because they are nimbler and better positioned to take advantage of short-term opportunities. Numerous studies, including a 2019 research by Aurum, a fund of hedge funds, and a 2015 paper by scholars from the City University of London, show the connection.


But large hedge funds got their revenge this year, according to Daniel Leveau, vice president of investor solutions at SigTech.

“Being small and nimble is one thing, but at least as important in today’s market environment is to possess ‘operational alpha,’” he wrote in an email. “It is not only about having the best investment ideas, but also about having a highly efficient operational set-up that enables a fund to trade everything everywhere at scale.”

Jon Caplis, founder and CEO of PivotalPath, said it was an unusual year for larger hedge funds this year. “Typically, the trend over the last number of years has been much more toward these smaller funds outperforming,” he told II. PivotalPath’s Equal Weighted Composite, which measures hedge fund performance regardless of size, was down 4.4 percent from January to September. In comparison, the Asset Weighted Composite, which tilts towards the larger funds, was only down 2.3 percent. “That’s a pretty significant difference between our two composites,” he said.

Caplis attributed the outperformance of larger funds to a structural reason. The high performers in the hedge fund industry this year are mostly multi-strategy funds or managed futures. These strategies, he said, tend to be adopted by large funds because they require significant investment in modeling and infrastructure. “The barriers to succeed in [these strategies] are very high,” he said.