Small hedge funds are able to turn a profit and expand with considerably less than $100m (£77.28m) in assets under management, a new study has revealed from prime broker GPP and trade body the Alternative Investment Management Association (Aima).
The survey of 135 smaller hedge funds across the globe found that the average break-even point, where the incoming fees exceed the outgoing expenses, is around $86m.
This goes against previous studies, which have suggested that firms need to have more than $200m in assets under management in order to reach profitability.
“Our research disproves the notion that only relatively large, institutionalised businesses can succeed in the modern hedge fund industry,” said Aima chief executive Jack Inglis.
“This is good news not only for the future health and wellbeing of the sector but for investors too, since smaller managers have often been the source of many of the industry’s greatest innovations.”
A third of firms were even able to cash in with just $50m or less in assets under management.
Break-even was found to be highest among global macro hedge fund firms, at around $132m on average, and lowest for alternative credit fund managers at $77m on average.
Across all types of strategy surveyed, smaller hedge fund managers were on average getting more money in from management fees – even before adding performance fees – than they were paying out in expenses.
Around half of managers were charging 1.5 per cent or less of the fund's net asset value for their management fees, while around two thirds were charging less than 20 per cent of profits for their performance fee.
According to GPP's director and head of prime brokerage Sean Capstick, the break-even figure is significantly lower than previous estimates as other studies have included larger managers.
These more sizeable fund managers, who may be more accustomed to receiving larger fees, could assume that it would be impossible to run a small fund profitably.
However, although the headline figures looked promising for smaller hedge funds, there were some clouds in the sky.
Almost 90 per cent of the firms surveyed said they allocate up to one fifth of their total expenditure to regulatory compliance, with this sum expected to increase when the second Markets in Financial Instruments Directive (Mifid II) kicks in at the beginning of next year.