Investors play it safe and allocate far less money to new hedge funds than to more seasoned portfolios, even though research shows newcomers often perform better, according to data released by Citigroup Inc (C.N) on Monday.
More than six dozen investors polled by the bank said that between 2009 and 2011, they put an average $16 million with each new manager they funded, less than half the average $37.7 million check they wrote to firms with a longer track record.
Overall, the 78 investors surveyed by Citi Prime Finance said that during the period 2009-2011, they allocated $12.4 billion to new funds within the first 12 months of their launch.
Investors "risked significantly less money on new funds than with proven managers," the survey's authors wrote.
While much research shows that upstart funds are often hungrier and take riskier bets to ultimately deliver better returns, the survey results suggest investors are extremely cautious. These investors are making selections at a time when hedge fund investments are becoming more popular but also at a time when big blowups and heavy losses during and after the financial crisis have given many customers reason to be careful.
Investors that allocate money to new hedge funds tend to have bigger investment teams of their own to carefully review the fund they might put money with, the survey found. They pay particular attention to a new manager's previous experience and track record, plus the stability of the investment team and the fund's operational infrastructure.
"It is not just a matter of transparency and reduced fees anymore," Chris Greer, global head of capital introductions at Citi Prime Finance, said in a statement. "We found investors also want more two-way dialogue with the new funds management and portfolio teams."
(Reporting By Svea Herbst-Bayliss in Boston; editing by John Wallace)