Investors are moving away from larger hedge funds and reallocating assets to smaller, more nimble funds.

Large hedge funds aren’t having a good year thus far. While many managers are still capable of generating alpha for investors, some large, established funds have negative returns year-to-date.

June was a particularly hard month for portfolio managers as concerns over the sovereign debt contagion in Europe weighed heavily on U.S. equity markets. Firms like Paulson & Co. and Tudor Investment Corp. are down several hundred basis points for the year on their flagship funds.

“The first half of 2011 has been disastrous for a few large firms who have seen their performance suffer greatly. Those funds that have performed well are predominately smaller in AUM and have proven themselves adept at seizing opportunity,” Ward Corbett, managing partner at Catalyst Partners, told Markets Media.

Recent data from administrator GlobeOp showed that investors are beginning to put in redemption requests and pull capital from funds they’re invested in as outflows superseded inflows for July. The Hennessee Hedge Fund Index, a broad-based index that measures performance of the industry as a whole, was down 1.2 percent for June.

Investors are beginning to look at hedge funds with smaller amounts of capital under management. Their ability to act quickly and respond to changing market conditions faster than larger funds has made them a prime choice for investors looking to reallocate capital. Some investors have already filed redemption requests with larger firms and are looking at smaller funds as an alternative.

“Currently new and small managers seem to be back in favor,” said Corbett “It is expected that larger investors will continue to increase investing more capital via direct funds smaller funds and emerging manager funds. Smaller funds are focused on achieving above average risk adjusted performance as opposed to some larger funds where maintaining the size able management fee often takes priority.”

It remains to be seen if the exodus from larger funds will continue to benefit smaller and mid-sized funds, but for now, small is equal to stable.