Emerging manager renaissance

KnowRisk Consultingwe crunch the numbers so you don't have toKnowRisk Consultingwe crunch the numbers so you don't have to

By Peter Urbani, KnowRisk Consulting

Early signs of a renaissance in Emerging Manager Hedge Fund Returns ?


• Emerging Manager Funds (defined here as those Hedge Funds Funds which are less than 36 months old and have less than $300m in AUM) tend to be run by highly motivated, entrepreneurial and focused managers.

• In addition, the exploitable opportunity set they have identified in the marketplace is more likely to persist over the short-term.

• Simply put – Emerging / Early Stage Managers try harder.

• All of this translates into excess returns or alpha of up to 600bp per annum*.

• It is fair to say that the ‘price’ of this excess alpha is in the form of higher business risk associated with a start-up operation.

Why Emerging Managers ?


• This places a higher burden of responsibility on those performing qualitative due diligence to verify the managers ability to properly scale and grow their businesses.

• * Depending on which database is used some of this may be attributed to backfill and / or survivor bias. However, notwithstanding these biases, Emerging Managers deliver at least 200bp per annum in excess of the returns of established managers.

• Emerging Managers do have occasional periods of relative underperformance to established managers , typically after crisis periods, however the drawdowns associated with Emerging Managers are also lower.

Why Emerging Managers ?


Average Returns decrease with timeAverage Hedge Fund Returns versus no of Months

8.92%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90 96 102 108 114 120 126

No of Months

Re

turn

s (

An

nu

ali

se

d )

Avg Ann Returns per no of months

Avg Ann Returns - All periods

The Seven Year Itch ?


Emerging vs. Established Returns


Emerging vs. Established ReturnsEmerging Managers versus Established Managers

3101

844

0

500

1000

1500

2000

2500

3000

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Emerging Managers less than 12 months old and less than$100m AUM

Established Managers older than 12 months



2007

638

0

500

1000

1500

2000

2500

3000

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14





1786

469

0

500

1000

1500

2000

2500

3000

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14




Emerging vs. Established Statistics


What about Survivorship Bias ?


Only 20% of Funds ever exceed $1bnTime to achieve AUM Milestones versus % Achieving AUM

1416

26

587

449345

237131

7.80%9.39%

11.68%15.27%

21.19%

3.72%

0

100

200

300

400

500

600

700800

900

1000

1100

1200

1300

1400

1500

0 5 10 15 20 25 30 35 40 45 50 55 60

Average time in Months

AU

M $

m

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

% A

ch

ievin

g A

UM

Average Fund Size at time

% of Funds achieving AUM


Emerging Manager ‘Alpha’Emerging versus Established Manager 'Alpha'

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

MorningStar EM Alpha Eurekahedge EM Alpha


Fund of Funds Flows finally turn upNet Asset Flows to Fund of Hedge Funds 1990 – Q2 2014

($120,000)

($80,000)

($40,000)

$0

$40,000

$80,000

$120,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Source: HFR


Number of Funds recoveringNumber of Hedge Funds and FoF

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

11000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

FoF HF

Source: HFR


Emerging vs. Established ReturnsEmerging v.s. Established Manager Returns

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Emerging Managers less than 36 months old and less than $300m AUM



• After struggling mightily post the GFC there are finally some early signs of a possible renaissance in Emerging Manager excess returns or ‘Emerging Manager Alpha’.

• The recent downturn was caused by ongoing fallout from the GFC, uncertainty about pending legislation and consolidation in the Funds of Funds space.

• The total number of Hedge Funds and FoF is approaching its pre crisis high of over 10,000 funds

• More importantly, Fund of Funds which were a major source of seed capital for Emerging Managers have finally stopped hemorrhaging AUM.

• As a result we expect to see continued improvements in relative outperformance from Emerging Managers as hedge fund issuance / new launches picks up.

Conclusions


Emerging Manager ‘Alpha’Emerging versus Established Manager 'Alpha'

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

MorningStar EM Alpha Eurekahedge EM Alpha


Emerging v.s. Established Returns


PersistenceReturnRisk


Important Notes• The information contained herein (the "information") is intended for illustrative purposes only, has been developed internally and has been based on variations of existing funds, managed accounts, simulations, extrapolations of other investment programs, pro forma data or taken from trade and statistical services and other sources that we deem reliable, although no warranty is made that the information is accurate or complete and it should not be relied upon as such.

• The information is not intended to depict or predict actual investment performance of any financial product and is subject to change without notice.

• Any opinions expressed herein reflect KnowRisk Consulting’s judgment at the date and time hereof and are subject to change without notice.

• The information should not be construed as legal, tax, investment or other advice.

• This does not constitute an offer to sell, or the solicitation of an offer to buy, any product. An offer may only be made by means of the offering memorandum and governing documents of the relevant funds (the "Fund Documents"), which should be read in their entirety.

• The information is not intended to be complete or final and is qualified in its entirety by the Fund Documents. In the event the Information is inconsistent or contrary to the descriptions or terms of the Fund Documents, the terms of the Fund Documents shall prevail.

• Interests in the funds are privately offered to investors who satisfy the eligibility criteria described in the Fund Documents.

• The Information is CONFIDENTIAL. It is intended only for the use of the person to whom this document is given and may not be reproduced or redistributed without permission.

• Any securities discussed herein may not be suitable for all investors. Transactions of the type described herein may involve a high degree of risk, and the value of such instruments may be highly volatile.

• Past performance is not guarantee of, and cannot be construed as an indication of, future results.

Date post:	14-Jun-2015
Category:	Business
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Emerging manager renaissance

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