However, over the full history of the indexes, from 1996 through 2008, small funds performed best, with an annualized return of 13.05 per cent versus 9.99 per cent for medium-sized funds and 9.28 per cent for large funds.

Along with its stronger returns, the small fund index also showed greater volatility over the 13-year period with an annualized standard deviation of 6.96 per cent versus just 5.92 per cent and 6.05 per cent for the medium-sized and large fund indexes, respectively.
 
Meredith Jones, managing director at PerTrac, says: 'There are several possible reasons why small funds underperformed their larger peers for the first time ever in 2008. Due to losses across the board, hedge funds experienced heavy redemption requests last year. Larger funds generally have more cash on hand and greater access to lines of credit than small funds, better enabling them to handle redemption requests without compromising their portfolios' performance.

'The recent market crash also appears to have prompted a 'flight to quality' among investors, with surveys indicating that hedge fund investors have become more interested in larger, more 'institutional' funds. So it's likely that smaller funds had to deal with relatively greater redemptions than did their larger peers. We also noted a larger differential in the number of large managers reporting in both the prior and current studies, with a larger percentage of small managers participating in both updates. As a result, there is heavier survivor bias in the large fund group. Other possible reasons include infrastructure considerations, greater reliance on beleaguered prime brokers, and larger redemptions from poor performers pushing more managers into lower asset bands.'
 
Hedge funds with the shortest track record continued their trend of superior performance last year as the young fund index lost -11.31 per cent for the year compared to much larger losses of -19.46 per cent and -17.85 per cent by the mid-age and older fund indexes, respectively.

Over the full history of the indexes from 1996 through 2008, young funds have generated an annualized return of 15.74 per cent while mid-age and older funds have trailed with annualized returns of 11.48 per cent and 10.12 per cent, respectively.

Young funds have also fared best from a risk perspective over the long term; the young fund index has produced an annualized standard deviation of just 6.47 per cent over the 13-year period while the mid-age and older fund indexes have proved more volatile with annualized standard deviations of 7.11 per cent and 6.72 per cent, respectively.