New York City and Greenwich, Conn. are widely seen as the hedge fund industry's power centers, but investors would be better off with managers from Chicago, Ill. and Boston, Mass., according to a new study of returns by geography.
Balter Capital Management
, a $1 billion Boston-based fund of funds
focused on emerging managers led by Brad Balter, analyzed the performance of hedge funds in seven cities from 2000 to 2011. Apparently the first of its kind, the study ranks how funds in Boston, Chicago, Dallas, Greenwich, Los Angeles, New York and San Francisco performed during various time periods and market shocks, and their correlation to asset classes and each other.
Managers in Chicago performed best, producing an annualized gain of 13.64% between January 2000 and December 2011. Boston was second at 11.90%, followed by Dallas (up 11.53%), New York (up 10.49%), Greenwich (up 9.89%), Los Angeles (up 9.35%) and San Francisco (up 9.33%).
"Our findings suggest that hedge fund performance behavior varies widely depending on the geographical location of the firm," explained the report, which was led by Balter senior analyst Ben Deschaine. "A major contributing factor to differences in performance is likely driven by the style and strategy of hedge funds that are most prevalent in a particular city."
The report suggests that cities have developed areas of expertise and investment styles. For example, San Francisco firms tend to make more aggressive bets using their technology expertise; Chicago's managed futures prowess leads to more uncorrelated returns, and the Greenwich area's macro bent allows for better crisis-management.
The correlation of geographic returns also suggests idea sharing, exemplified by various Dallas-based funds shorting subprime mortgages like Highland Capital Management, Hayman Advisors and Corriente Advisors. "In the 2007 time period, Dallas exhibited much lower down market capture and beta than all of the other cities, which we believe is due to the short subprime trade that some high profile managers had on at the time," the report said without naming specific funds.Balter Capital Management Hedge Fund Regional Performance Study