The Hedge Fund Research Index weighed composite shows that in 2023, smaller funds delivered returns of about 4.5%, while their larger counterparts delivered just 3.3%. Over five years, the gap widens with small funds delivering average annual returns of 5.9%, with larger ones delivering just over 4%. 

​

A 2023 report from investment data company Preqin found that hedge funds with less than $100 million in assets under management have delivered average net annualized returns of around 8% since 2010. Larger hedge funds averaged approximately 6%.

 

And, because future profits build on the existing investment, these higher returns compound each year – meaning these percentages could be significantly higher over the life of an investment.

​

What explains this ability to outperform?
 

Start-up, small, and emerging hedge funds are nimbler and enjoy less organizational complexity. Small fund managers may also have greater incentive to succeed by taking more calculated risks.
 

So, if investing in a smaller fund is so much better, why doesn’t everyone do it? The reason is simple: Most people don’t know how to find the right small hedge fund. There are an estimated 10,000 to 15,000 hedge funds worldwide, of which 60-70% are small. In 2023 alone, some 440 new hedge funds launched. Even more importantly, while investors can assess a fund’s investment strategy, gauging business and operational risk is much more difficult.
 

Regardless of size, every fund has to manage the same broad range of complex issues – most of which have nothing to do with managing the investment. Big funds have the resources for huge IT departments, for dedicated teams to manage compliance, governance and a range of other specialized functions.
 

Small funds that fail do so because of business and operational problems, not because the investment strategy is flawed.
 

Examples include inefficient or flawed internal operational processes; failure to comply with regulations; fraud and other misconduct; undisclosed conflicts of interest; and, poor vendor selection.

 

The trick is knowing how to identify which small hedge funds offer that greater upside potential while minimizing downside risk – especially business and operational risk. Solidus Advisors can help institutional investors, capital allocators and family offices evaluate funds’ business and operational risk. We know the questions to ask – enterprise-wide down to specific issues.