Rookie Hedge Fund Managers Able To Outperform Veterans

by Carla Johnson, Investors Offshore.com

07 July 2005

A new study has contradicted the conventional wisdom that more experienced hedge fund managers with a good track record will always outperform the 'rookies' in the industry.

According to a report by Hedge Funds Research, "emerging managers", or managers that have been overseeing funds for less than two years, have a tendency to outperform their more experienced peers. The primary reason for this is because new managers are under more pressure to achieve results in order to attract new business, and therefore take more risks to obtain higher returns for investors. The report also noted that smaller hedge funds were more "nimble" and therefore more flexible in their trading activities.

HFR found that this so-called "rookie effect" was most pronounced during the first twelve months of a new hedge fund's life. However, this was also the most vulnerable period for new hedge funds, precisely because they need to take more risks and are more reliant on performance fees to stay afloat.

Another factor that makes new hedge fund ventures more vulnerable is that fund managers often find themselves running a business in addition to running an investment portfolio, HFR noted.

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