It’s a truism that in the hedge-fund industry, size matters. Investors are unlikely to take a risk on a small or new hedge fund without a performance record, when they can just as easily go with a larger fund that has the seal of approval from others.

But the absolute level of assets under management can be trumped as a selling point by AUM momentum, or in other words, what have you done for me lately. The perception is, if a hedge fund has been bringing in money recently, they must be doing something right.

“Momentum in asset growth is more important to being successful in raising hedge-fund assets for small and medium-sized hedge funds than the current asset size of the organization,” said Don Steinbrugge, managing partner at Agecroft Partners. “The reason for this is that most hedge fund investors put much more weight on what happens to a hedge fund after the initial meeting than on the historical track record.”

In a report, Steinbrugge wrote that a prospective investors typically watches hedge funds for at least six months after an initial meeting, as part of the due diligence process. “During this period the investors will read the monthly/quarterly letters, follow performance, and also keep track of trends in assets under management,” Steinbrugge said. “If a firm is not growing despite a continued strong track record, investors will be reluctant to invest because they believe there must be a reason why other investors are not investing in the fund.”

“As a result of this phenomenon, success in asset raising is much more likely for a fund that has grown from $100 million to $300 million over the past year than a $1 billion hedge fund that has had no asset growth,” Steinbrugge wrote.

For a hedge fund, capital-raising momentum is a virtuous cycle of sorts, as inflows beget more inflows. But for an investor, buying in on strong AUM momentum isn’t necessarily a good thing. it can be likened to chasing performance, and oftentimes today’s top-decile manager is tomorrow’s bottom-decile manager.

Even large, established hedge funds would be well-served to heed momentum of assets under management and guard stable AUM from turning into sagging AUM. “Hedge funds need to have a high-quality product offering, be able to articulate the differential advantages of their product offering across each of the evaluation factors investors use to select hedge funds, and have a high-quality sales strategy,” Steinbrugge said.

Aside from AUM momentum, another means for a hedge fund to differentiate itself in the capital-raising arena is via affirmation from an independent third party.

“It is vital to have a series or set of champions; advocates, if you will, who can point to the consistency of your performance and your investment process as an overlay to your internal marketing efforts,” said Ward Corbett, managing partner at Catalyst Partners Management. “At Catalyst we have sought out third-party confirmation on our process and strategy. This type of confirmation from a recognized risk management firm has helped to attract investors we otherwise wouldn’t be able to access.”