You would know that you are at the pinnacle of your hedge fund game when investors are begging to plunk in their money with you. Size does matter. Most hedge funds have capacity constraints in that the investment strategies can be only applied successfully to an optimal level of AUM. Also, to maintain a consistent performance level will be increasingly difficult with larger growing capital. Warren Buffet succinctly sums it up: Rule No. 1: Never lose money. Rule No. 2: Never forget rule No.1.
For example, if a start-up hedge fund has a target annual return of 20% and he/she loses 10% in second year, the fund needs to generate 60% return in proceeding year in order to have 20% annual growth back to track. It is evident here that the investing business is never easy.
SAC certainly is one prime example of a hedge fund titan. See, SAC to Close Its Flagship Fund to New Investors.
NEW YORK—SAC Capital Advisors LLP, one of the nation's most prominent hedge funds, is closing its flagship fund to new investors starting Aug. 1, a person familiar with the situation said Wednesday.
The hedge fund, run by well-known manager Steven Cohen, is "soft closing" the $14 billion long-short equities hedge fund, the person said, meaning that it isn't accepting capital from new investors for the time being, but may accept funds again at a later date.
"Steve has never been an asset gatherer," the person said. "He thinks the fund size now is optimal to opportunities in the market."
Growing fund size helps investment advisers, who earn management fees in proportion to their asset size. But investors have become worried lately that the swelling size of some very large hedge funds is making them unwieldy, and is a sign managers are emphasizing amassing capital over higher returns.
When funds reach a certain size, "one is not exploiting market inefficiencies, but making the market," said Jay Rogers, president of investment consultant Alpha Strategies Investment Consulting. "Hedge funds are all about exploiting inefficiencies and delivering alpha," or above-market returns after adjusting for risk.
He said that increasingly hedge funds, both big and small, are limiting the amount of fund inflows to match their strategies' optimal trading capacity.
Note: Extracts copied in verbatim
For example, if a start-up hedge fund has a target annual return of 20% and he/she loses 10% in second year, the fund needs to generate 60% return in proceeding year in order to have 20% annual growth back to track. It is evident here that the investing business is never easy.
| Year | Capital | Gains | Returns (%) |
| 0 | 100,000 | ||
| 1 | 120,000 | 20,000 | 20% |
| 2 | 108,000 | -12,000 | -10% |
| 3 | 172,800 | 64,800 | 60% |
| 4 | 207,360 | 34,560 | 20% |
| 5 | 248,832 | 41,472 | 20% |
SAC certainly is one prime example of a hedge fund titan. See, SAC to Close Its Flagship Fund to New Investors.
NEW YORK—SAC Capital Advisors LLP, one of the nation's most prominent hedge funds, is closing its flagship fund to new investors starting Aug. 1, a person familiar with the situation said Wednesday.
The hedge fund, run by well-known manager Steven Cohen, is "soft closing" the $14 billion long-short equities hedge fund, the person said, meaning that it isn't accepting capital from new investors for the time being, but may accept funds again at a later date.
"Steve has never been an asset gatherer," the person said. "He thinks the fund size now is optimal to opportunities in the market."
Growing fund size helps investment advisers, who earn management fees in proportion to their asset size. But investors have become worried lately that the swelling size of some very large hedge funds is making them unwieldy, and is a sign managers are emphasizing amassing capital over higher returns.
When funds reach a certain size, "one is not exploiting market inefficiencies, but making the market," said Jay Rogers, president of investment consultant Alpha Strategies Investment Consulting. "Hedge funds are all about exploiting inefficiencies and delivering alpha," or above-market returns after adjusting for risk.
He said that increasingly hedge funds, both big and small, are limiting the amount of fund inflows to match their strategies' optimal trading capacity.
Note: Extracts copied in verbatim
