Seeking Return Over Size
- Emerging manager investors – early stage “angel” investors – can now access a growing menu of cost-effective options to secure an even larger emerging manager allocation customized to their risk appetite. New and expanding execution vehicles and platforms are easing the challenge of investing substantial amounts into smaller emerging funds.
- Over various time periods, academics have documented emerging manager outperformance of 1.7-2.2% per year. This outperformance is especially notable as it is even greater during times of crisis, a trend which is garnering increased attention after a recent period of hedge fund underperformance. As a result, many hedge fund allocations are being re-evaluated and entire portfolios re-underwritten to place emerging manager allocations in greater focus.
- Alpha becomes beta over time and this occurs at a faster pace with large capital inflows. Those seeking manager return over manager size must place themselves alongside advisors with strong sourcing capabilities.
- Creating customized emerging manager portfolios is now possible given technology innovation in risk management oversight and reporting.
- Among emerging manager solutions, alignment and efficient fee negotiation prowess are key differentiators that lead to stronger maintenance of an emerging manager return premium. In particular, alignment is found among separately managed account (“SMA”) platforms that typically increase capacity by sourcing new offerings, rather than adding more capital to existing strategies which may erode the performance edge.
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