Hedge funds overseeing more than $5 billion drew 70 percent of net capital raised by the industry in 2011, according to Chicago-based Hedge Fund Research. Though that's down from 80 percent in 2010, the largest firms are still the most able to absorb the large checks written by clients such as pension funds and sovereign-wealth funds.
"As institutions increase their allocation to hedge funds, the focus on established managers with longer track records, significant assets under management and robust infrastructure will continue," said William Smith, Morgan Stanley's European head of hedge fund capital introductions.
Corner Cafe, Starbucks
Barclays analysts say they're skeptical that investors will follow through on intentions to allocate more to small managers. The bank's poll surveyed 165 hedge-fund clients who had about $500 billion invested during last year's third quarter.
"It's more an indicator of desire for size diversification, rather than something that is necessarily going to translate into action," said Anurag Bhardwaj, Barclays Capital's head of strategic consulting. "If there is extreme market volatility and you don't know what is going to happen next, your instinctive reaction is to stick with the tried and tested."
Another risk of investing in hedge funds with less than $1 billion of assets is that they are more reliant on incentive fees generated from good performance to run their business and pay staff, Bhardwaj said. A stretch of losing years can force a small firm to shut down because it can't retain talent, he said.
Maraviglia concedes that's true.
"If you take a hit or something goes wrong, there's a bigger risk of blowing up," he said. "It's more likely for a small coffee shop down the road to go bust than Starbucks."