Emerging managers are in a buoyant mood looking ahead to the rest of 2022 – despite renewed market volatility and economic uncertainty underpinned by the war in Ukraine and rising inflation.
• Start-up hedge funds are more confident on their performance outlook for this year than larger and more established firms
• Two-thirds of European emerging managers say strategy returns are either in line with, or have exceeded, expectations in 2022
• Gains for nimble strategies during a difficult year could put them in pole position with investors as returns among brand-name managers flag
Emerging managers are in a buoyant mood looking ahead to the rest of 2022 – despite renewed market volatility and economic uncertainty underpinned by the war in Ukraine and rising inflation.
If they’re right, start-ups may prove one of the few hedge fund groups to continue a winning run. Success for emerging managers in 2022 may give investors – many swayed by the industry’s gains in 2020 and 2021 – pause for thought as they prepare to deploy capital to ‘safer’ larger managers.
New research conducted for Hedgeweek’s latest Insight Research Report – which explores how newer firms are tackling an assortment of business and operational challenges – shows the bulk of start-up names are more confident in their outlook than their larger, more established counterparts.
Overall, 90% of North American emerging managers have a positive outlook for their fund’s prospects for the rest of 2022, compared to just 10% which hold a negative outlook.
Across the Atlantic, it’s a similar picture: 83% of emerging managers in Europe have a positive outlook for 2022, with 17% describing their outlook as flat. By comparison, positive sentiment in the wider hedge fund industry lags slightly, with 80% of managers positive, 10% flat and 10% negative on the rest of the year.
Reflecting on their investment performance so far this year, one-third of European hedge funds said their year-to-date performance was in-line with expectations, while another third say returns have exceeded expectations.
Bloomberg data commissioned for the report shows European emerging manager fund performance across all strategies stood at 6.1% in the first four months of 2022, comfortably outflanking the broader hedge fund industry as a whole, which gained 1.5% during the same period.
Within long/short equity – generally regarded as the cornerstone strategy of the hedge fund industry – European emerging managers (defined as firms with less than $250 million AUM and track records of less than five years) were up 3.8% in the period between January and April. That compares to the 1% return generated by long/short managers across all sizes.
Despite this, many allocators continue to show a degree of aversion towards newly-established hedge funds, citing concerns over track record and capital base, among other things.
Alyx Wood, chief investment officer at Kernow Asset Management, a UK equities-focused long/short contrarian strategy launched in 2019, observes that while “large” often feels “safe” for many investors who continue to tread with caution around start-ups, stats show that boutique managers frequently outperform their bigger competitors.
“Studies show that, without a doubt, emerging managers – the hungry ones, the ones that have an edge – outperform,” Wood says. “That’s where all the alpha is.”
Key implication | Emerging managers: In a testing economic environment, start-up managers running nimble, niche strategies have the potential to successfully generate uncorrelated alpha in a competitive field – putting them in pole position as returns among brand-name managers start to flag.
