While analysis of the fundraising environment yields a familiar result, the ways emerging managers differentiate themselves is continuing to evolve.
While analysis of the fundraising environment yields a familiar result, the ways emerging managers differentiate themselves is continuing to evolve.
Even after the recent lull in hedge fund launch activity (HFR data suggests Q2 2022 saw the lowest number of new funds since Q4 2008), there remains a wealth of options for investors seeking emerging managers, including a succession of socalled ‘celebrity’ launches spinning out from, and with the financial backing of, brand-name managers.
So, how will start-up hedge funds stand out from the crowd in 2023? And what attributes, trends, products, and channels are cutting through the noise?
Some funds have been doubling down on the qualities that allocators associate with emerging managers more broadly, like the Asia-based long/short equity fund Hedgeweek interviewed targeting “more aggressive returns” and investors with greater “appetite for volatility”.
Others have taken the opposite approach, like emerging crypto hedge fund Campsor Capital. According to partner Arianna Luna, Campsor seeks to take “minimal market risk” by investing with a market neutral approach monetising market dislocations across a range of instruments and venues.
Beyond performance
However, most emerging hedge fund firms – Campsor included – recognise that an uncommon investment strategy is not enough. During her conversations with investors, Luna highlights the senior team’s mix of backgrounds, which includes a 12- year crypto native and two partners from traditional finance. This, she says, has been resonating with those traditional investors exploring crypto and seeking expertise within a credible, institutional framework – an unusual combination among the initial burst of crypto launches that emerged during 2020-2021’s bitcoin price surge.
Emerging credit specialist Acer Tree is similarly minded. When asked to describe how he articulates the firm’s ‘edge’ to investors, CIO Jonathan Bowers headlines his list with “team experience”, in part due to allocators’ lower tolerance for mistakes in the current trading environment (see box-out).
Of course, professional investors seek longterm partners, not quick profits, and this has been increasingly true for interest in hedge funds, driving the industry’s institutionalisation. Today that extends to emerging hedge fund managers. Investors are hoping to find the next Millennium Management, Viking Global or Brevan Howard – and they want to see senior executives with institutional experience, progressive ideas, and infrastructure built for
sustainable growth.
This trend is a double-edged sword. On the one hand, it has been responsible for driving up the barriers to entry for new hedge fund businesses (and is the reason brand-name spin-outs, with their readymade safeguards, attract so much attention and capital). On the other hand, it has offered emerging hedge fund businesses a raft of new opportunities to differentiate themselves, such as building excellence around company culture or demonstrating a commitment to ESG or DE&I.
Softer factors
Of course, not all expectations are created equal. Interviewees said investors were still less willing to compromise on company culture and operational infrastructure than they were on ESG and DE&I. These latter soft factors were more likely to be accepted as works in progress, so long as policies and procedures exist and there is an identifiable roadmap to implementing them in the future.
Among the family offices and funds of funds surveyed so far for Hedgeweek’s allocator survey, ESG was ranked fourth of four priorities for 2023, after performance, liquidity, and fees.
Encouragingly for emerging managers, investors are showing more understanding around what can be delivered on product types and terms. As figure 3.1 shows, demands for separately managed accounts, strategy carves-outs, co-investments, and – perhaps most significantly – discounted fees were less likely reported by smaller firms surveyed (AuM <$250m) than midsized firms (AuM $250-999m).
In terms of DE&I, emerging manager programs from large investors are continuing to turn heads and attract attention in the media. Campsor has a diverse board membership (as well as a female COO), but Luna doesn’t believe its strong showing in terms of DE&I has “opened the door to more conversations” with allocators. “In this market, investors care about performance and risk management,” she notes. “Perhaps in a couple of years it will help to differentiate.”
For marketing channels, emerging managers interviewed by Hedgeweek said getting on the radar of investment consultants remained important, while anchor/seed investors were as valuable as ever, especially while markets remained volatile and investors’ appetite for risk was more muted.
Fund databases
But also notable were references to, and praise for the benefits of performance databases. Anecdotal evidence suggests an increasing number of smaller funds are using them as routes to investor long lists, particularly where establishing relationships with investment consultants is challenging. Several of the emerging managers interviewed said they reported to multiple databases. Among survey respondents from smaller hedge funds (AuM <$250m), databases were the second most important service or function used for fundraising (43%) – behind only personal networks (see figure 3.2).
Crypto fund Campsor reports performance to two databases – one from a well-known provider and one that specialises in crypto funds – after one of the firm’s partners had success with such platforms previously and recommend their use, Luna explained.
She noted that “the majority” of her investor conversations were still being generated by the team’s personal network, but “at this stage of the market cycle” it was important for the fund to find as many cost-effective avenues to investment as possible. Her primary concern, she said, was ensuring their database relationships were with “renowned” platforms.
Fewer smaller hedge funds surveyed identified cap intro (39%), investor events (36%), or investor roadshows (18%) as top channels for seeking investment. All three tend to require travel, and research interviewees suggested that the number of in-person meetings had decreased over the past 18 months as investors embraced virtual meetings to screen out funds quickly and efficiently during initial rounds.
Many marketers have mixed feelings about this. NightShares head of institutional sales Steven Greenblatt noted that, while virtual meetings had the advantage of getting you in front of once-unreachable overseas (and local) investors, they had the disadvantage of decreasing human interaction and the chances of successfully articulating your edge. Virtual meetings are here to stay. But the successful return of physical events also suggests that questions over the future benefits of traditional sales skills – especially within the emerging manager industry – are premature.
Key takeaway | For managers | The importance of an anchor investor in today’s market environment cannot be overstated. Launching without one – or without one lined up – is at best a material risk, at worst tantamount to a long, expensive road to liquidation.
