Digital Assets Report


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Section 2 | Volatility and dispersion

Emerging managers say it’s been harder to win new business in 2022 than in 2021, with investors either backing off or doubling down on stringent investment thresholds.

Emerging managers say it’s been harder to win new business in 2022 than in 2021, with investors either backing off or doubling down on stringent investment thresholds.

By and large, investor interest in smaller hedge funds has held firm. But is accessing that interest more challenging than this time last year? Asked to describe capital raising now compared to 12-18 months ago, 43% of the emerging hedge fund managers surveyed (AuM <$250m, track record <5 years) said it was ‘harder’ now than it was, while nearly a quarter
said it was ‘easier’.

Among all hedge fund respondents, 41% said it was ‘harder’ and 18% said it was ‘easier’ (see figure 2.1).

In many ways, these results reflect a key characteristic of the current market – the wide dispersion of fund managers’ returns and experiences, with a significant number of hedge funds enjoying wild success and many more encountering serious challenges.

As a result, this has proved a fruitful period for media outlets. At the upper end of the AuM spectrum, there have been reports of Citadel posting significant gains YTD through October across its fixed income (25.8%), tactical trading (21.5%) and equities (17.4%), and Rokos Capital Management macro flagship being on course for a record annual haul, 44% YTD. Equity brands like Tiger Global and Whale Rock, meanwhile, have been reportedly posting eye-catching losses.

‘Unfashionable’ equity

Equity hedge fund managers were among the subgroups surveyed most likely to describe capital raising as ‘harder’ now than 12-18 months ago (47%). They were also marginally more likely to describe it as ‘easier’ than hedge funds overall, perhaps due to ongoing interest from asset managers and funds of funds (around two in five of these investors are planning to increase an allocation to long/short equity, the preliminary results of Hedgeweek’s allocator survey suggest).

Furthermore, when asked to identify the biggest capital raising challenges currently, half of all equity hedge fund managers participating in Hedgeweek’s Q3 manager survey said, ‘an investment strategy that some investors consider unfashionable’ and half said, ‘an unfavourable trading environment for our investment strategy’.

For emerging managers surveyed, the top-ranked challenges were as expected: assets under management that are too small and a track-record that’s too short (see figure 2.2). Steven Greenblatt, head of institutional sales at equities-focused emerging investment business NightShares, echoed several interviewees when describing investors’ attitude to AuM and track records as particularly stringent in the current market environment. Some leniency is exercised within emerging manager programs, where a start-up meets additional requirements around DE&I. But, as always, such attributes merely open the door to a conversation.

Market conditions are requiring larger investors, in particular, to be ruthless in their assessment of existing investments and risk averse in their manager selection.

High-profile recent examples include Illinois Teachers Retirement System fully redeeming its $264 million investment in quantitative hedge fund firm PDT Partners, and The Detroit Policemen & Firemen Retirement System fully divesting from hedge funds.

More concerning for emerging managers was the news last month that Canada Pension Plan (CPP) Investments had chosen to withdraw its seed investment from emerging hedge fund firm BirchLane Capital. BirchLane, a relatively high-profile credit launch founded by former JPMorgan credit trader Fajr Bouguettaya, failed to meet CPP’s targets for growth and returns, reports suggested.

Assuaging concerns

What practical steps have emerging managers been taking to assuage client concerns during the recent market turbulence? Improved lines of communication are expected, of course, and where the investor pool is small, benefit from being one-on-one. An Asia-based hedge fund firm interviewed by Hedgeweek on condition of anonymity has given its investors direct access to the firm’s CIO. The key here, is ensuring that money managers are available
to provide guidance without affecting their ability to manage the portfolio – most investors are hugely supportive of this balance.

Digital asset hedge funds have had to deal with more volatility than most – making the backgrounds and expectations of a fund’s investors particularly important. Arianna Luna, partner, COO, and head of investor relations at emerging crypto specialist Campsor Capital, says the team is yet to face awkward conversations with clients, partly because the fund is yet to have a major drawdown, but partly because the majority of their investors have crypto experience, which the fund assesses ahead of accepting subscriptions, she says.

Crowded markets

Ultimately, the biggest challenge for emerging managers will be to stand out from the crowd (more on this in the next section); the biggest pitfall for their fundraisers being an overreliance on crowded markets.

Where will marketing professionals at emerging managers be competing for investment? The results of Hedgeweek’s Q3 manager survey offer a note of caution, with familiar hotspots of activity. Figure 2.3 presents the results for emerging managers overall. The following investor type/region combinations are being targeted by at least one quarter of the emerging managers surveyed: US-based family offices (57%), funds of funds (48%), foundations and endowments (43%), and investment consultants (43%); family offices (38%) and funds of funds (29%) globally; and UK-based funds of funds (29%).

By region, the majority of US-based emerging managers are focused on family offices (90%), foundations/endowments (80%), and funds of funds (70%), predominantly in the US. In Europe, the focus is similar, albeit alongside the region’s established network of private banks (67%). More significantly, European emerging managers’ marketing teams will hope to engage with investor types globally – from the UK, continental Europe, and, to a lesser degree, the US.

For some smaller managers, the requirement to travel will stretch resources and divide attention at a time when resources are precious. For many others, this will be another opportunity to engage in virtual marketing. As discussed in the next section, this presents both challenges and opportunities.

Key takeaway | For managers | The emerging manager market has rarely been so crowded, with fierce competition for familiar investor groups. It is imperative that firms differentiate themselves. IRs that are overly reliant on virtual marketing, dispensing with the human touch, may find it particularly hard to stand out.


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