Emerging managers have outperformed all hedge funds YTD, with data showing they outperformed hedge funds by 4.8% on average over the past three years, according to Hedgeweek’s latest Insight Report.
• Emerging managers have outperformed hedge funds for three consecutive years by an average of 4.8%
• Investors remain hesitant to invest in emerging managers without industry reputation, a solid capital base or a structured team
• Emerging managers may need to institutionalise earlier in their lifecycle in order to attract investors
Emerging managers have outperformed all hedge funds YTD, with data showing they outperformed hedge funds by 4.8% on average over the past three years, according to Hedgeweek’s latest Insight Report.
Despite this, start-up managers have struggled to capture investors’ attention, as Hedgeweek’s survey finds that over 80% of emerging managers (those with less than £250m AUM and younger than five years) judge attracting investor flows as the single biggest challenge during the initial launch process.
The findings were featured in Hedgeweek’s latest Insight Report, The Next Generation: How emerging managers are adapting to the new hedge fund landscape.
Interviewees noted how, despite the positive performance of emerging managers and their reputation at previous funds, managers still struggle with capital raising, with almost half (46%) considering it to be harder than this time last year.
“You may have someone who has a ten-year track record in a particular strategy launching by themselves and even though you can follow the breadcrumbs of the track record, investors are still reluctant; it’s frustrating,” says Donald Pepper, Trium Capital’s co-CEO.
So what’s the challenge?
18% of emerging managers surveyed still judge a lack of established track record and industry reputation as major hurdle.
After a difficult start to 2022, it’s no surprise that certain investors have chosen to err on the side of caution. Investors are looking to avoid the next ‘blow-up’ and aren’t willing to take the risk, observes Wayne Yu, CEO and chief investment officer at BCK Capital.
“Emerging managers need to have the capital base to support a team of at least four or five people to be seen as credible and as a viable investment,” says Marlin Naidoo, global hedge of capital introduction at BNP Paribas.
While there may be more risks, emerging managers do offer value and the potential for good returns.
“Innovation and fresh perspective remain highly valued in the hedge fund industry, as investors recognise that complacency leads to subpar returns, and emerging managers can bring novel approaches to their strategies,” says Travis Williamson, head of hedge fund investment and due diligence and partner at Albourne.
The appetite is there, with data from law firm Seward & Kissel’s 2022 Alternative Investment Allocator Survey showing over 70% of investors have invested in managers founded under two years ago.
David Shalom, director, capital introductions at BNY Mellon | Pershing, says that investors look for three key attributes in emerging managers: the manager’s return history and previous experience; enough AuM to cover operating expenses and business risks so that investors can ensure they’re getting the exposure and returns they’re seeking; and finally, proof of concept and faith in the manager’s investment process so that investors know the firm will grow over time.
Perhaps the real challenge is that competition has simply become fiercer, and managers need to prove their lifespan and investment potential to investors early-on.
“Investor expectations have evolved to the point where emerging managers need to have a path to institutionalisation early in their lifecycle. Investors aren’t waiting on the sidelines for new managers to produce a three-year track record, they’re making allocations earlier in a fund’s lifecycle, and with earlier support comes accelerated expectations,” says Williamson.
Key Implication | Managers: Investors are displaying an appetite for emerging managers as innovation and new investment strategies pay-off in returns
