Small Hedge Funds

The size of a hedge fund is usually determined by the total value of its assets under management (AUM). However, since there is no upper limit to how big hedge funds can potentially become, there is also no clear definition of what makes a "small" hedge fund. The dozen or so largest hedge funds currently in existence have many billions of dollars in AUM, while the smallest may have AUMs in the tens of millions.

One threshold for "small" funds, which many financial players informally consider the dividing line between small and mid-sized funds, is $100,000,000 in AUM. This is because hedge funds over that threshold are legally required to file quarterly 13F disclosure forms with the SEC. This makes $100,000,000 an intuitively understandable cut-off point, as investors often look for hedge funds that are above that threshold as role models or inspiration for investment ideas. Or, to put it bluntly, many "small" funds are considered to be beneath the notice of the SEC, so inexperienced investors tend to ignore them as well. Though as we'll see, this is actually a grave mistake.

When hedge funds are discussed, you sometimes hear the biggest ones compared to whales – and the comparison certainly holds. Few things in the ocean can hope to stand against the power of a massive blue whale. In keeping with the metaphor, you could compare smaller funds to sharks or orcas. They might not have the sheer imposing power of the blue whale, but they are quick and agile where the size of the blue whale sometimes works against it.

Smaller funds, such as the quant strategies to which CARL can give you access, can typically react more quickly to market events. Quants, in particular, are often better equipped to react to minute changes in the market. Since they are data-driven and make investment decisions based on computer algorithms, they can quickly take advantage of tiny inconsistencies, even within small time windows. Super funds could easily overlook these tiny investment opportunities – or they might recognize them and fail to act, as the potential gains seem too insignificant for them.

Thus, some smaller firms have been able to generate more annual growth than some of the biggest players on the market. Many of them focus on investing in tiny opportunities, each of which nets them only small amounts of capital – but added together, they add up to considerable gains. To keep with the maritime metaphor, a whale might need to find a school of fish or krill large enough to warrant the effort of hunting them, whereas a shark may hunt smaller fish individually and still eat its fill.

With the invention of data-driven hedge funds, which use computer modeling to make investment decisions, hedge funds that fit the "small" bracket have actually received something of a boost in recent years. That's because they have been able to generate significant returns with their digital approach, while many of the largest hedge funds still cling to the traditional model of the old world – a famous hedge fund manager at the helm, making investment decisions at least partly based on intuition and personal experience.

Over the past decades, quantitative hedge funds performance has frequently been better than the performance of significantly larger funds. Even during challenging times such as the COVID-19 pandemic or the 2008 financial crisis, they have typically performed better than non-quantitative hedge funds.

Many investors, particularly inexperienced ones, also still put too much emphasis on valuing hedge funds according to their assets under management and focus too much on well-known investment fund managers. This has led to a situation where investors in the know can make much more significant gains by choosing data-driven hedge funds equipped for the 21st-century market environment instead of following the herd and investing in large hedge funds, which might not perform equally well.

CARL's goal is to enable any accredited investor to get into the quantitative hedge fund game, investing in smaller funds that often outperform the giant hedge fund firms on the market. Some of these strategies you may have never even heard of, and yet, with 15%+ targeted returns, they are certainly up to the task of demonstrating why sheer fund size and star power aren't everything.