Is size important? You bet!

Wed Jun 8, 2011

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Earlier this week, Dalton Strategic Partnership soft-closed its European absolute return UCITS fund to new investors at $500 million following a period of ‘strong inflows’ ( see earlier story).

At the same time, however, the largest fund on the Absolute UCITS database –Standard Life Investments’ mega Global Absolute Return Strategies fund, which is 25 times larger than the DSP fund– still continues attract flows even with assets under management of more than $12.5 billion at the beginning of June 2011.

GARS is one of the best selling UK funds and flows into it have been so strong the asset manager created a Luxembourg-domiciled SICAV for continental European investors ( see earlier story) and hired a US-based marketer at the end of last year ( see story from InvestHedge).

Which begs the question: does size matter? Clearly, for some strategies, especially those using strategies that are not easily scalable, size is important to retain stellar performance.

Both funds highlight that successful funds attract more assets. The reason for DSP’s move to soft close its UCITS fund was to maintain its performance as Leonard Charlton and his team generates substantial returns from short side stock selections. GARS is a multi-asset fund so by definition can invest in most regulated asset classes and strategies available to them – therefore it would have more capacity.

It could be argued that SLI and DSP are very different asset managers so have very different objectives – the former being a spin off from an insurance company and the latter a boutique asset manager. But the presence of both firms in this space highlights the convergence between hedge funds and the long-only world in the UCITS arena.

Excellent funds run at their optimum not maximum size and many investment or portfolio managers I have spoken to over the years have said that the fund becomes a different beast once it breaks through a particular AUM barrier. Many investors prefer smaller and nimble funds because of the size issue.

I remember one fund manager telling me that everything changed once one of his funds hit the $10 billion mark. Time will tell if GARS has what it takes to be a mega fund and have continued performance.

SLI has launched a bond version of GARS – and both funds are managed by teams led by Euan Munro. It seems logical to conclude that the reason for the launch of the bond fund is because the mega fund is simply too big to gain from individual credit positions.

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