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A $50 million fund can be a toy
Why a toy fund works
Toy isn't meant as an insult, since the toy might do better because it is held with a looser grip. Less is on the line, so the manager is less paralyzed by the sheer quantity of dollars.
Pressure on professionals
Bets that are an order of magnitude larger than any money someone has ever had carry a monumentalness, and the psychology shows. The same pressure explains why individuals outperform more easily than professionals. A flyer on a stock with a marginal fraction of net worth needs no explaining and brings no judgment later, while a larger dollar amount affects a track record and has to be justified.
Sizing up a manager
It also changes how to size up a manager. A person with a couple hundred million in the bank raising a $30 million fund starts from a very different place than someone with a million raising $100 million to make the most money from it. The personal financial situation of a manager is an underrated thing to ask about, and the facts about the person count for more than the investing thesis and track record.
Why do larger stakes feel heavier?
Psychologists Daniel Kahneman and Amos Tversky described prospect theory in 1979. Their finding was that people feel losses more strongly than equal gains. The size of the amount at stake also changes how people judge a decision. A loss that is large relative to a person's wealth gets weighed far more heavily.
How does fund size relate to performance?
A 2005 study by Steven Kaplan and Antoinette Schoar looked at private equity funds. They found that performance was concave in fund size, meaning returns rose with size to a point and then flattened or fell. The study also found that funds from firms raising successive funds tended to grow larger. Fund size and manager skill are therefore tangled together in the data.
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