Size matters. Small ones perform better.

The institutionalization of the hedge fund industry has forever changed the business.  In the early days, speculative investment in the nascent hedge fund stratosphere consisted of the individual rogues.  The outsiders.  The CTAs.  The floor traders.  The CPOs.

They used various techniques:  technical analysis, stochastics and momentum….  More often than not they traded “paper”, taking positions in a commodity knowing that other natural hedgers were taking a position.

But the pension funds caught return envy, particularly when comparing their own returns to their counterparts who were early adopters of alternative investment strategies…. executed deftly by Harvard University endowment, or Marvin Damsma at Amoco Corporation.

And so the also-rans increased their allocations to alternative strategies, exposing their constituents to risks they did not always understand.   And when they did not, they would use the compulsion of their gorilla size to impose upon a manager’s investment style.

What has happened to absolute returns is that as institutional investors started to enter the game, and as hedge funds managers were happy to clip coupons in management fee, the institutions demanded risk controls that make the large hedge funds look a lot more like mutual funds.