Thank You Sir May I Have Another?!?
The first time I ever saw Kevin Bacon in a movie was the infamous and hilarious flick “Animal House.” Although he didn’t yet have the appeal of, oh say, Ren McCormick (me-ow!), he did make an impression on me in his fraternity brother days. Perhaps it was his tight-assed, ROTC-inspired declaration of “All Is Well!” during the movie’s climax that got my attention. But, more likely, it was his tighty-whities in the infamous fraternity initiation paddling scene that caught my eye. I couldn’t imagine, even at the ripe old age of 8, that a grown man would allow another man to paddle him. IN HIS UNDERWEAR. And would cheerfully, though admittedly through gritted teeth, ask for another. And another. And another.
But then again, there are a lot of things I don’t understand, even today at the ripe old age of, well, not 8 years old. For example, I don’t understand why another study showing that smaller and younger funds outperform is necessary or the results touted as surprising.
Haven’t large funds been spanked with this data enough by now for us all to cheerfully conclude that smaller, younger funds outperform their older, larger peers?
I guess not, because just two weeks ago yet another entry in the small/young fund cannon made its appearance. On April 26th, Chao Gao and Chengdong Yin (Purdue University) and Tim Haight (Loyola Marymount University), used data from the Lipper TASS and the HFR databases to prove YET AGAIN that good returns come in small and new packages.
Now, as someone who actively supports emerging and diverse (who are often also emerging) managers, I should be happy to see yet another entrant into the verifiable tsunami of studies proving that small and young funds outperform. But really, isn’t it a little bit embarrassing at this point? I mean, it’s not like we don’t have a metric crapton of research that shows small and young funds outperform already, right? But just in case there was ANY doubt left in anyone’s mind at this point, allow me to point you to the studies that may help you reach the well-documented conclusion that, when it comes to emerging managers, all is, in fact, well.
Small & Young Funds Are Killing It – A Non-Exhaustive, But Pretty Damn Complete List of Research
PerTrac studies on emerging managers, 2007-2011
eVestment studies on emerging managers 2012-2014
Mayer & Hoffman paper on emerging managers. May 2006. Also appears in the book “An Investor’s Guide to Hedge Funds”
“An Examination of Fund Age and Size and Its Impact on Hedge Fund Performance” Derivatives, Use, Trading and Regulation, February 2007
“An Examination of Fund Age and Size and Its Impact on Hedge Fund Performance,”Journal of Investing, vol. 18, no. 1, spring 2009.
“Emerging Managers: Good Buy or Good Bye?” Barclays Capital, 2011.
“Smaller Hedge Fund Managers Outperform: A Study of Nearly 3,000 Equity Long/Short Hedge Funds” AllAboutAlpha.com, February 18, 2013
“Are Investors Better Off with Small Hedge Funds in Times of Crisis?” City University London, July 14, 2015.
“Emerging Hedge Funds Outperform Established Peers” Preqin, July 2017 (multiple other years of studies also available)
“Size, Age and The Performance Life Cycle of Hedge Funds” Gao, Yin, Haight, April 26, 2018.
Want some long-only fund action? I got that, too. How about:
“Does Fund Size Erode Mutual Fund Performance? The Role of Liquidity and Organization” Chen, Hong, Huang, Kubik, December 2004
“Liquidity, Investment Style and the Relation Between Fund Size and Fund Performance” Yan, 2008.
“New Evidence on Mutual Fund Performance: A Comparison of Alternative Bootstrap Methods” Blake, Caufield, Ioannidis, Tonks, October 2015.
“On Size Effects in Separate Accounts” Evans, Rohleder, Tenesch, Wilkens, August 2017.
And how about some Private Equity findings?
“Making the Case for First Time Funds” Preqin, November 2016
“Feels Like the First Time” PitchBook, 4Q2017
As I mentioned, this is a decent representative list of studies of small and new funds across the asset management spectrum. It is not exhaustive, mostly because I’m not sure it needs to be. I mean, you can’t really be standing there decked out in your undies asking me to hit you with even more data, right? So, let’s put the kibosh on proving something we should already know and just work to bring home the Bacon by investing in funds of all shapes, sizes, ages and types, not just tried and true established managers.