The arrival of institutions has forced hedge funds to change their strategies. Instead of seeking buccaneers that can deliver big returns, cautious pension funds prefer steady managers who can produce small, consistent gains.
"The institutional hedge funds have taken risk way down because that's what the clients want," says James Dilworth, CEO of Simple Alternatives, which operates S1 Fund (SONEX), a mutual fund that invests with hedge fund managers.
The institutions have been flocking to a limited number of large hedge funds. Such giants can perform well in downturns, but they cannot trade as nimbly as smaller operators. The sheer size of the funds could be hurting results. Studying returns from 1996 through 2011, consultant PerTrac found that small funds with less than $100 million in assets returned 12.5% annually, while big funds with more than $500 million returned 9.2%.
James Dilworth's S1 Fund aims to overcome the problems of the institutional hedge funds. The mutual fund invests in portfolios managed by five boutique hedge fund managers. The portfolios are small enough to trade nimbly. Each manager owns promising stocks and sells short shares that seem overvalued.The aim is to outdo typical hedge funds by limiting losses in downturns and delivering decent results in up markets. Lately the fund has been succeeding. In the past year, S1 Fund returned 4.9%, outdoing competing ETFs by a comfortable margin. It is too soon to know whether the two-year-old mutual fund can succeed over the long term. But by focusing on entrepreneurial managers, the fund could be able to deliver the kind of returns that hedge funds generated in the past. Follow @StanLuxenberg This article was written by an independent contributor, separate from TheStreet's regular news coverage.
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