Within the world of managed funds be they hedge funds, private funds, alternative investments or mutual funds there is an observation that performance drops off with size. The traditional arc of the life of a managed investment is that a new manager pops ups, generates impressive performance, attracts a truck load of money and then struggles to replicate their earlier performance.
This paper looks at the implications of this phenomena and why it might be so.
For me the most telling of the paper is this table –
The performance drop off with increasing size is well shown but what is also interesting is that drawdown drifts up and then plateaus. So those in the fund are earning less but also exposed to larger swings in equity.
The conclusion has a very insightful sting in it –
But it is a necessity in order to identify and tap into up and coming talent. In the words of one of our long time colleagues, Tom O’Donnell (a Partner with The Bornhoft Group – a firm that has been specializing in multi-manager CTA portfolios for 25 years), he agrees that asset growth is an important part of the manager due diligence process. He says, “The tricky part is determining if the asset growth makes the manager better at managing money? Or better at counting the money he manages?” The goal in our eyes is to get a hold of a manager when they are good at managing the money, and not yet thinking about counting the money.