The size of assets under management (AUM) is one of the more common factors many investors use in their initial screening process to come up with a preliminary shortlist of investable funds. Some investors, in particular the larger ones, might be constrained by their necessarily large ticket size, resulting in them only looking at funds above a minimum AUM. Others may be concerned about the costs associated with, and sustainability of, a fund with a small asset size. From our interactions with investors and fund managers over the years, we believe that the threshold AUM for a fund to begin to gain traction with professional investors is US$100 million. We see many new funds launch every year, but few have launch AUM sufficient to be immediately viable for institutional investors. In this research paper, we try to quantify some of the above qualitative observations. We look at the start-up AUMs of funds and how funds with different start-up AUMs performed, as well as their ability to attract capital subsequently.
Our universe consists of funds from the Eurekahedge Emerging Market database with data going all the way back to January 2000. We have included in this study only funds which reported AUM within one year from inception, and we regard the first AUM reported by the fund in its first year of operation as its start-up AUM. We observed that no funds in the database launched with an AUM of more than US$400 million. Large launches rely less on database visibility to raise assets, hence the lack of incentive to list on one. Our eventual universe consists of 510 funds, of which 172 funds had liquidated on or before May 2011.
In this study, funds are grouped into five different groups according to their AUM at inception.
The groups are defined as follow:
≤ US$5 million
> US$5 million and ≤ US$10 million
> US$10 million and ≤ US$25 million
> US$25 million and ≤ US$75 million
> US$75 million
We found that over the past 11 years, close to 70% of funds in Asia excluding Japan and Australia launched with an AUM of US$25 million or less. The average launch size of a fund over the same period was just US$23 million.
Except for the very small launches, those with AUM of US$5 million or less on day one, and the large launches, those with AUM of more than US$75 million on day one, close to 80% of funds which liquidated, did so within five years from inception. The average lifespan was 3.9 years.
Funds which launched with AUM of less than US$5 million showed low consistency in outperforming their peers, while funds which launched with an AUM of more than US$75 million consistently underperformed. Our study also showed however, that despite the consistent underperformance it was much easier for a larger fund to raise assets, and these funds were able to raise assets at a much faster rate compared with their smaller counterparts.
Profile of new funds
The first part of our study looks at the profile of new funds which were launched between 2000 and 2010.
The number of new funds increased steadily from 2000 to a peak in 2007, with the exception of 2006, when the number of new launches dipped slightly before picking up again the subsequent year. The number of new fund launches has since been on a downward trend from 2007. Throughout the entire time, there was consistently a spread in sizes of new fund launches.
Before 2004, very small funds made up a big proportion of new launches as 50% of new funds launched with an asset size of US$10 million or less. Although the percentage of very small launches decreased slightly subsequently, at least 70% of new funds each year still launched with an asset size of US$25 million or less. With the exception of 2001, less than 10% of funds launched with an AUM of more than US$75 million each year.
The yearly average launch size of funds ranged from US$15 million to less than US$35 million over the past 11 years, with an overall average of US$23 million. Despite 2006 seeing a fall in the number of new launches from the previous year, the average launch size of funds was the highest that year, at US$31 million. 2007 was also a good year as the average fund launched with an AUM of US$30 million. From the previous chart, we see a relatively larger percentage of funds which launched with assets of more than US$75 million over these two years, hence the upward skew in average launch size compared to other years.
Lifespan of funds
In this next section, we look at funds which are classified as ‘liquidated’ by Eurekahedge. The life span of a fund is the difference between the dead date, as defined by Eurekahedge, and the inception date of the fund.
Of the 510 funds launched between January 2000 and December 2010, a total of 172 funds shut down over the same period. The average lifespan of this group of 172 funds was 3.9 years.
Except for funds with an initial launch size of less than US$5 million, at least 50% of funds which liquidated over the last 11 years do so within the first three years since inception. About 80% of funds which liquidated do so within the first five years since inception, with the exception of the smallest and largest funds; i.e. those which launched with an AUM of less than US$5 million or more than US$75 million. In fact, large funds at launch liquidated either within three years from inception or after five years.
Breaking down the average lifespan of funds by strategy, we can see a couple of outliers, but these are usually associated with the small number of funds that shut down for that strategy. Fixed income funds and Asia including Japan long-only funds have an average lifespan of less than two years on average. At the other extreme, Asia excluding Japan long-only funds and Korea long-short funds have a much longer average lifespan of more than seven years. Generally, most funds that liquidated have an average lifespan of between two and a half and four years regardless of strategy.
Performance of funds
The following section looks at the performance of funds versus their launch size. The previous section found the average lifespan of a fund to be 3.9 years. Hence, in this section, we look at the average performance of funds for each of the five AUM buckets over the first three years after the launch of the first fund in the bucket.
For funds in the same AUM bucket, we calculated the average monthly return of the bucket only three months after the launch of the first fund in that AUM bucket. This is to prevent returns of a single fund from skewing overall returns of the bucket. For each year, the three-year return is calculated since the average return of all five buckets become available.
Funds which launched with an AUM of between US$10 million and US$25 million tend to show most consistent outperformance. Funds with an initial AUM of less than US$5 million have three years returns that fluctuate the most, outperforming significantly in two instances but underperforming in the others. Large funds (those with start-up AUM of more than US$75 million) consistently underperformed for all years.
Comparing launch size with the rate of growth of assets
Lastly, we look at the percentage of funds that eventually managed to raise assets beyond US$100 million and US$200 million, and the number of years taken to reach these sizes.
35% of all funds eventually raised assets beyond US$100 million, of which 63% brought assets up to US$200 million or more. It is evident that the larger the fund, the easier it is for a fund to attract capital.
Less than 20% of funds which launched with an AUM of US$5 million or less eventually run assets of US$100 million, compared to 50% of funds which launched with an AUM of between US$25 million and US$75 million.
The time taken by funds which launched with a smaller asset size, to reach US$100 million and US$200 million, was also visibly longer than that taken by funds which launched with a larger initial AUM. A fund which launched with an AUM of less than US$5 million took on average two and a half years to get to US$100 million if they did manage to raise US$100 million. This compares to slightly more than half a year taken by funds with an initial AUM of more than US$75 million.
A large proportion of the universe of hedge funds launched with a small asset size of US$25 million or less, and less than half of the universe eventually raised assets to beyond US$100 million. Of funds that liquidated, half ceased to exist within three years from inception.
Despite funds with larger AUM at launch being the weakest performers of all funds, most still managed to gather assets and at a much faster rate.
GFIA, a Singapore-incorporated exempt financial advisor, has provided research on, advice about, and discretionary management of hedge funds since 1998. Almost uniquely, GFIA does not provide marketing services - it is fully objective. GFIA offers to investors a comprehensive range of services, driven by its research and understanding of hedged and absolute return managers in Asia, Latin America and other developing capital markets: management and advice of separate accounts, due diligence and manager analysis, portfolio construction and discretionary management, advisory services, wealth management services. For more information, please visit www.gfia.com.sg.