These Hedge Funds Do Better

Hedge funds under three years old have delivered additional gains of almost 4 percent annually, according to a study from Preqin and 50 South Capital.

Illustration by II

Illustration by II

Investors are often wary of investing in hedge funds without a long track record — but new data show that it’s these funds that are delivering the highest returns.

Recently launched hedge funds have outperformed more established funds by almost 4 percent annually since 2012, according to a new study from data firm Preqin and fund-of-funds manager 50 South Capital.

The study compared the performance of established hedge funds with what it calls “early-lifecycle funds” — defined as hedge funds that are less than three years old — between January 2012 and June 2019, covering a total of 1,591 hedge funds across 1,254 managers.

“Preqin data shows that, in 2019, only half of hedge fund investors would consider evaluating an early lifecycle hedge fund, and even fewer would actually invest,” the report stated. “When we evaluate the performance of managers in their early years, though, the argument for investing early is very compelling.”

[II Deep Dive: First-Time Private Debt Managers Struggle to Raise Money]

According to the study, new hedge funds beat older funds by 3.7 percent on a three-year annualized basis, and outperformed by 4.6 percent over five years. In fact, hedge funds early into their lifecycle beat more established funds in every year included in the study.

Even in 2018, when hedge funds and markets as a whole suffered losses, the three-years-and-under group did a better job of protecting investor capital, according to the study.

The outperformance was recorded across hedge fund strategies, with one exception: Established macro funds outperformed by 0.49 percent during the 12 month period ending in June 2019. Over the full evaluation period of 2012 to mid-2019, however, early-lifecycle macro funds beat older funds by 10.9 percent.

The additional gains recorded by newer hedge funds came with only slightly higher risk, according to Preqin and 50 South Capital. The two firms reported that the standard deviation, or variability in returns, for early-lifecycle funds was 1.2 percent higher than older funds on a three-year basis, and just 0.5 percent higher over five years.

Still, they warned that not all new hedge funds will necessarily do well, noting that their data only represent the average fund.

“The challenge is finding those with the best chance of outperforming,” the report concluded. “This is where an investor’s network, contacts, and reputation are critical in gaining access and getting early looks at managers.”