As I’ve written about before, there is an inverse relationship between hedge fund AUM and performance. Below we look at the top ten small hedge funds posting big returns over the last year.
Academic studies have shown that small hedge funds tend to outperform large funds.
Why are smaller funds returns better? A few possible explanations:
- The best performing hedge funds tend to invest in smaller stocks. For an astute manager, inefficiently priced, under-researched, illiquid small-caps offer more opportunity. As Peter Lynch said in One Up on Wall Street, “Big companies have small moves, small companies have big moves.”
- As AUM grows, hedge funds encounter “capacity constraints” whereby strategies lose profitability due to the negative price impact of larger trades. A growing fund is forced to invest in ever more liquid – and less profitable — stocks.
- Also, as AUM increases, the fund’s founder typically delegates more authority to other, potentially less talented, managers. According to this study, “as a result of hierarchy costs, the underperformance of large hedge funds is especially severe for hedge funds managed by multiple principals.”
- And small fund managers tend to have more “skin in the game.” With significant personal wealth in the fund, a manager has more incentive to focus on portfolio returns (versus spending time raising capital and making money from steady management fees).
Here are the top ten small hedge funds posting big returns over the last year. To make the list, a fund must have 13F AUM (reported long holdings) between $100M and $1B. Also the fund must have filed 13Fs every quarter of the last 3 years and have 10 or more holdings.
Top small hedge funds posting big returns over the last year.
| Fund | City | Fund Size | # Holdings | 13F MV | Tunover | % in Top 10 | QoQ Perf | 1-YR Perf | 3 YR Annual Perf | Earliest 13F |
| GLYNN CAPITAL MANAGEMENT | MENLO PARK | Small | 49 | $ 941,165,000 | 10.20% | 57.00% | 10.97% | 95.49% | 44.58% | 3/30/01 |
| ORACLE INVESTMENT MANAGEMENT | STAMFORD | Small | 20 | $ 758,849,000 | 15.00% | 97.83% | 6.06% | 91.72% | 25.48% | 9/29/04 |
| CHEYNE CAPITAL MANAGEMENT (UK) | LONDON | Micro | 57 | $ 202,581,000 | 47.37% | 52.64% | 6.59% | 78.72% | 14.93% | 3/30/06 |
| KAYAK INVESTMENT PARTNERS | SAN FRANCISCO | Small | 30 | $ 732,095,000 | 40.00% | 63.23% | 12.02% | 75.36% | 31.02% | 12/30/16 |
| ALTA PARK CAPITAL, LP | SAN FRANCISCO | Small | 31 | $ 690,821,000 | 32.26% | 53.73% | 12.31% | 75.02% | 36.29% | 12/30/15 |
| TENZING GLOBAL MANAGEMENT | SAN FRANCISCO | Micro | 18 | $ 223,131,000 | 55.56% | 83.70% | 25.24% | 74.81% | 39.84% | 12/30/16 |
| CALIXTO GLOBAL INVESTORS | CORAL GABLES | Micro | 12 | $ 155,038,000 | 41.67% | 92.49% | 17.64% | 72.16% | 17.37% | 12/30/15 |
| GARNET EQUITY CAPITAL HOLDINGS, INC. | NEW YORK | Small | 30 | $ 486,938,000 | 43.33% | 87.75% | 12.26% | 69.58% | 20.89% | 12/30/07 |
| GHOST TREE CAPITAL | NEW YORK | Small | 46 | $ 345,988,000 | 63.04% | 58.05% | 19.02% | 62.25% | 24.16% | 12/30/13 |
| WHETSTONE CAPITAL ADVISORS | SHAWNEE MISSION | Small | 31 | $ 539,849,000 | 16.13% | 63.20% | 7.32% | 61.83% | 24.77% | 3/30/14 |
Menlo Park-based Glynn Capital leads the pack of small hedge funds posting big returns, with one year performance of 95.49% through the end of Q3. Glynn’s 44.48% 3-year annualized return is #1 in the hedge fund universe. The firm is primarily focused on the tech sector.
Glynn Capital’s 44.48% 3 year annualized 13F return is #1 in the hedge fund universe.
Here are Glynn’s top performing holdings through the recent quarter’s end.
| Stock | Total Return | Original Purchase Date |
| FTCH Farfetch Ltd | 482.71% | 8/15/19 |
| NOW ServiceNow Inc | 400.03% | 5/16/13 |
| VEEV Veeva Systems Inc | 277.51% | 5/18/15 |
| OKTA Okta Inc | 255.13% | 2/15/18 |
| AMZN Amazon.com Inc. | 232.80% | 2/15/12 |
Glynn & Associates was founded in 1983. The principal owner of the firm is John W. Glynn. Portfolio manager of public equities is Jacob Ziemann. The firm had total AUM of $1.29B as of Dec. 31, 2019. 13F holdings were $951M at Q3’s close.
Glynn Capital – Methods of Analysis and Investment Strategies from the firm’s ADV.
Once the team has identified a potential investment, employees conduct a fundamental research process, meeting with some or all of the following: the company’s management team, investors, customers, suppliers, competitors, partners, and others. The investment team begins to evaluate if the company satisfies its investment criteria. The Firm seeks to invest in companies with a large market opportunity; a high-quality management team that can attract and retain talent; an attractive businesses model that can produce high levels of operating cash flow; and distinct competitive advantages that are durable in nature. This analysis considers qualitative and quantitative factors that GCM believes influence the company’s long-term potential.
After the Firm has qualitatively determined that it would like to be a long-term shareholder of the business, the investment team builds a valuation model based on the body of research compiled to determine, in the Firm’s view, the fair market value for a company. Such models typically evaluate the downside, upside, and base case of the business to determine whether the investment as proposed provides a return that meets GCM’s underwriting guidelines.
Health-care focused Oracle Investment Management‘s position in Quidel Corp. (QDEL) swelled to over $393M at Q3’s close. That represented 51.91% of the Stamford, CT hedge fund’s long portfolio. According to WhaleWisdom, the fund first bought QDEL at an estimated $16.87 in Q1 of 2017. The stock was recently trading at $199.
An equal-weight portfolio of Oracle’s top 20 13F holdings was up 91.72% through Q3’s close. That’s the 2nd best performance among small hedge funds.
Oracle Investment Management was founded by Larry N. Feinberg in 1993. From the fund’s ADV Part II.
Methods of Analysis & Investment Strategy
Our investment strategy is based primarily on a top-down approach of understanding how the healthcare industry is evolving, followed by a bottom-up analysis of which companies we believe will out-perform or underperform over time. We start by identifying broad themes or disruptions within the global healthcare landscape. We then identify which industry sub-sectors will be most impacted by change. Next, we determine which companies within the sub-sectors we believe will win or lose based on those changes. The process has been followed since our inception. Our greatest strength is the investment team’s experience in the industry and the ability to identify investment opportunities across sub-sectors of the healthcare industry.Investment criteria considered for new positions include:
Market conditions
Urgency of establishing a position
Whether the Fund has an existing investment in the issuer
Scarcity of asset (M&A potential)
New/emerging standards of care
Industry and business segment inflection points
Barrier to competitive entry (IP or patent protection)
Small- to mid-cap companies with the potential to displace market leader
Market inefficiency in valuing assets
London-based Cheyne Capital’s long portfolio was up 78.72% over the last year.
Cheyne Capital Management, based out of London, was one of the top hedge funds posting big returns over the last year. The fund’s long portfolio was up 78.72% through Q3’s close. Cheyne’s quarterly position turnover of 47.37% is the highest among the top ten small funds.
The fund’s #1 position at quarters end was also a new one — Yum China Holdings (YUMC), representing 14.73% of the fund’s $203M 13F portfolio.
Jonathan Lourie is the founder, Chief Executive Officer and Chief Investment Officer of Cheyne Capital Management.
Kayak Investment Partners saw a big jump 13F assets — from $239M to $732M — last quarter.
San Francisco-based Kayak Investment Partners has seen it’s 13F assets explode from $239M in Q2 2020 to $732M at the end of the 3rd quarter. Much of the growth can be attributed to the fund’s long portfolio gaining 75.36% over the last year. The fund held a portfolio of large cap tech stocks at Q3’s end. Alibaba Group (BABA) was the fund’s top holding, representing 14.54% of the fund’s $732M long portfolio.
Formed in 2012, Kayak’s co-founder and Managing Partner is Claude w. Hazan.
Ghost Tree Capital’s top new purchase in Q3 was SPDR S&P Biotech ETF(XBI) puts, representing 14.53% of the hedge fund’s long portfolio. With extensive holdings in the biotech/health care space, the hedge fund was no doubt using XBI puts (which will appreciate if the sector declines) as a hedge. Trillium Therapeutics (TRIL), the fund’s top long position, was bought during Q1 of this year at an estimated price of $7.71. The stock recently traded at $17.82.
David Kim founded New York-based Ghost Tree in 2013 and serves as the fund’s portfolio manager. An equal-weighted portfolio of his fund’s long positions gained 62.25% over the last year through Q3’s end.
Here is a description of Ghost Tree Capitals strategies. From the fund’s ADV part II.
By researching and analyzing a broad array of such value drivers, long and short investment opportunities emerge that are often overlooked or poorly understood. When evaluating long investment opportunities, Ghost Tree will generally attempt to identify companies which exhibit one or more of the following characteristics.
1) Companies that are launching new medical products (i.e. drugs, devices, equipment
and diagnostics) that are best-in-class, disruptive, and/or address key unmet medical needs.
2) Companies with innovative science and technology know-how protected by issued patents.
3) Companies that are running well-designed clinical trials examining drugs/devices that are likely to demonstrate strong efficacy and safety.
4) Companies led by strong management with a well-defined strategy, operational
discipline, conservative financial planning, and shareholder-friendly capital allocation.
5) Companies that are likely to benefit from regulatory, reimbursement, and/or
healthcare policy changes.
6) Companies that are in the midst of a major restructuring and on the cusp of a turnaround.
7) Companies that may be involved in M&A activity that should generate substantial
shareholder value.
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