HFR Asset Management has produced new research confirming the significant potential offered by early-stage investing in emerging hedge fund managers.
In the report, 'Emerging Manager Out-Performance: Alpha Opportunities from the Industry's Newest Hedge Fund Managers', HFR makes the case that emerging managers - defined as managers with less than a two year track record and currently representing nearly 10 per cent of the hedge fund universe based on assets under management - exhibit compelling absolute return profiles and have typically outperformed the overall hedge fund market.
There have been numerous articles published over the past few years documenting the out-performance of newer funds, particularly in their first two years, but HFR has advanced this analysis to identify the greater performance potential from new managers versus established managers launching new funds.
HFR concludes that:
"Funds in their early years tend to outperform funds in their later years, with the most significant out-performance occurring in the first 12 months of operation. Volatility remains constant, resulting in higher risk adjusted returns."
"Our analysis of new funds by new managers versus new funds by existing managers found that while both outperform in early years, new managers significantly outperform the established managers in the first year."
"While our analysis demonstrates that emerging managers can provide significant potential as a group, there are challenges to selecting the right managers and monitoring operational risks."
"As a group, the 564 managers tracked by Hedge Fund Research, Inc provide broad representation across the major hedge fund strategies. This diversity provides the potential to mitigate some of the risks inherent with emerging managers through diversification."
"Emerging managers can offer significant potential through alpha-pursuing strategies driven by:
• Greater incentive of young managers to outperform their peers to attract assets
• The nimble nature of smaller funds to focus on their best investment ideas
• The application of specific expertise to niche exposures."
Click here to view and download a full copy of the HFR report: http://www.hedgeweek.com/hwreports.asp