World’s Smallest Hedge Funds Increase Assets as Investors Seek ‘New Blood’

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The world’s smallest hedge funds struggled to raise money in 2010. This year, investors want in.

Funds managing less than $5 billion increased assets by $16.3 billion in the first quarter after adding $10.7 billion of new money in the whole of 2010, according to estimates from Hedge Fund Research Inc. Firms with $500 million to $1 billion of assets had the biggest reversal of fortune, bringing in $4.7 billion in the first three months of the year after $2.8 billion of net outflows in 2010.

“Investors are looking for new talent and new blood,” said Dominic Freemantle, a London-based managing director at Morgan Stanley who helps the firms attract money. “We are definitely starting to see some of the small and mid-sized managers raise decent assets.”

Clients who sought stability in big hedge funds after the collapse of Lehman Brothers Holdings Inc. (LEHMQ) roiled markets three years ago are increasingly looking at smaller firms in a search for better investment returns, clients and consultants say. Smaller firms are also seeking investors at a time when some of the biggest hedge funds have stopped taking money, said Craig Stevenson, a senior investment consultant at Towers Watson & Co. in London...