Smaller and younger hedge funds perform better than their larger and older counterparts, new research from the Imperial College Business School in London shows.

The Centre for Hedge Fund Research at Imperial, which has looked at all available hedge fund data between 1994 and 2010, said that the statement applies to all five commercial databases as well as all investment objectives.

The center also found that funds with greater managerial incentives outperform, and that hedge funds with strict share restrictions do not always deliver higher risk-adjusted returns.

Speaking at a panel discussion at Imperial College, Jeroen Tielman, founder and chief executive of IMQubator, a hedge fund seeding company, highlighted the importance of young talent: “If you only have one chance to put yourself in the market, that is the moment when the managers will do whatever they can to generate a good performance,” he said. “That might explain why young managers outperform mature managers.”

Momentum versus nimbleness

By contrast, David Yim, director at KPMG, the consultancy giant, played down the importance of both age and size: “It is actually about return and that is what all investors, whether they are small, large, sophisticated or unsophisticated, are looking for,” he said.

“I don’t think even that you can generalize over sophistication of investors,” said Yim, who leads KPMG’s investment management assurance advisory practice in London. “I have seen some family offices and high net worth individuals who have been incredibly sophisticated.”

“The key thing for me is that established managers have a momentum,” Yim said. “They have infrastructure, track record and the cornerstone investors. Smaller managers essentially need to build up their credibility and track record over time in order to attract more institutional money.”

Perhaps not surprisingly, Anne-Sophie D’Andlau, managing partner and manager of Paris-based CIAM, a young and small hedge fund, was of a different opinion: “Don’t forget that the smaller funds most of the time only manage one fund and the bigger funds manage 10 to 20 and sometimes even more funds,” she said. “That becomes difficult for them because they have regulatory constraints that we don’t have at our level. It is more simple to run one fund than multiple funds.”

“Hedge funds are a business like any other business; you have to be an entrepreneur and run it on a daily basis,” said D’Andlau. “We want to show what we are capable of, not just in terms of returns but the daily work we are doing.”

Professor Robert Kosowski, director of the Centre for Hedge Fund Research, highlighted that two-thirds of all hedge funds are only available on one of the five databases, and made the case for a comprehensive aggregate database.