Hedge funds: Flying solo or managing as a team?

One of the eternal debates in the fund management world is whether it is better if funds are managed by a solo fund manager or by a team of professionals. Lots of studies have been done to come to the conclusion that “it depends”. There is no single best way to manage a mutual fund, though the tendency is that single-manager funds tend to perform better on average but with higher volatility, while team-managed funds tend to perform in the middle of the road. However, no such study (to my knowledge) has been done in the hedge fund world.

Until the new paper by Yuhao Chen and colleagues flattered into my mailbox that did just that. They looked at the performance of 1,022 hedge funds registered in the MD, CISDM, and TASS databases and split them into funds managed by a single individual and funds managed by a team. As you can see below, the ratio of single-manager funds to team-managed funds is remarkably constant over time at 60:40.

Hedge funds managed by single managers or teams

Source: Chen et al. (2022)

In some respects, the results of their study confirm what we know about mutual funds. Single hedge fund managers tend to have higher abnormal returns on average than team-managed funds. But these higher average returns come at the price of higher tail risks and higher variance of returns. In other words, while the average single-manager hedge fund has better performance, individual funds can be at the very top or at the very bottom, depending on the decisions of the fund manager. Team-managed funds are in the murky middle, neither particularly good nor particularly bad.

But the study also found two other results that I think are worthwhile heeding. First, the study found that single-manager funds have better timing ability. The decision process in a team-managed fund is so slow that they tend to be too late to trade and miss a lot of performance due to this delay.

Second, and probably more interesting, single-manager funds tend to survive longer than team-managed funds. One key reason here seems to be that single-manager funds tend to be evaluated not just on performance alone. Investors in single-manager funds can, to some extent, identify with the manager. There is a name and a person they associate with the fund. And that means they are less likely to throw in the towel after a spell of bad performance than for a fund managed by a more anonymous team.