We take a look at the hedge fund industry’s emerging managers, defined as small or young funds, to evaluate their performance, the strategies employed, terms and conditions and investors in these funds.As Asset Management Industry Grows A Search For New Revenue Streams
Emerging managers are an important part of the hedge fund landscape, with investors drawn by their potential to offer higher returns among other reasons. However, the definition of an emerging manager will vary from investor to investor; what a large pension fund will consider as an emerging fund may differ from a small family office, for instance.Q1 2017 – Huge Page Of Hedge Fund Letters, Conferences, Calls, And More
In this article, we examine two ways to group or define emerging hedge funds to assess whether these funds do outperform their established counterparts, what appetite there is from investors and what options there are for investors looking to allocate capital to emerging managers. The criteria we evaluate emerging managers against are:
- First-time funds (FTFs) with assets under management (AUM) of $300mn or less;
- First-time funds with a track record of three years or less.
Young Funds Outperform Small Funds
Emerging hedge funds may be more prone to failure, either due to their strategies being untested through market cycles or as a result of their small size making them more vulnerable to capital losses. Therefore, investors expect emerging manager hedge funds to generate strong returns in order to compensate for the higher risk that can be associated with investing in them. Funds with a track record of three years or less, and funds with $300mn or less in AUM, outperform the wider hedge fund industry over a 12-month, three-year and five-year timeframe (Fig. 1). Funds that have a track record of three years or less produce significantly better returns than both funds with $300mn or less in AUM, and the wider hedge fund industry, delivering a five-year annualized return of 12.22% compared to 8.98% for small first-time funds. Some funds have returned significantly more than this; for example, Volpoint Fund, LP was launched in January 2016, and in the 12 months to May 2017 has returned 107.31%.
Funds with a track record of three years or less show similar volatility to the wider hedge fund industry over a three-year basis. There has also been a convergence in the rolling 12-month volatility of these groups in 2017 (Fig. 3). In contrast, funds with $300mn or less in AUM, which produce smaller returns over all timeframes compared to other groups of emerging managers, exhibit the highest volatility over a 12-month, three-year and five-year period. This indicates that investors, on average, may be rewarded with higher returns with lower volatility when investing in first-time funds with a shorter track record, compared with those that have smaller AUM.
Meet The Emerging Managers
Preqin tracks 867 first-time funds with a track record of three years or less, while there are more than twice as many (1,759) first-time funds with $300mn or less in AUM.
As seen in Fig. 4, Europe accounts for a larger share (22%) of first-time hedge funds that have $300mn or less in AUM than any other category. In contrast, just 15% of emerging managers with a track record of three years or less are based in Europe. More than two-thirds (70%) of these managers are based in North America, including Aecor Capital Management, which is headquartered in New York and was established in 2016. It launched its first fund, Aecor Fund, at the beginning of this year and employs an event driven strategy. Of the 14,621 active hedge funds tracked on Preqin’s Hedge Fund Online, the largest proportion (43%) employ an equity strategy (Fig. 5). This is also true across the different categories of first-time funds; however, for these funds the proportions are slightly higher. Across all fund groups, the largest proportion (16%) of CTAs are managed by emerging managers with funds of $300mn or less in AUM; for example, Germany-headquartered Catana Capital launched its debut fund, Catana Big Data, in June 2016.
As expected, the average minimum investment required for both types of first-time funds is lower than that of their more established counterparts (Fig. 6). Funds with a track record of three years or less – which have significantly outperformed the wider hedge fund industry on a 12-month, three-year and five-year basis – charge similar management and performance fees to all single-manager hedge funds. In contrast, emerging managers with $300mn or less in AUM, which outperform the wider hedge fund sector but to a lesser degree than their counterparts with shorter track
records, charge both lower management and lower performance fees.
Significant Numbers Of Investors Look To Emerging Managers
Although first-time funds with a shorter track record outperform funds with smaller AUM, investors exhibit a greater preference for smaller funds than funds with a shorter track record. Nearly three-quarters (72%) of institutions that are active in hedge funds consider investing in funds with assets of $300mn or less (Fig. 7). An example of this is Singapore Management University Endowment, which allocates SGD 250mn ($181mn) to the hedge fund industry. However, there is still significant interest in funds with shorter track records. Using data taken from Preqin’s portfolio search tool, which analyzes investor preferences based on the named fund investments previously made, there are 524 investors that are invested in a fund with a track record of three years or less. For example, Alvin & Fanny B. Thalheimer Foundation and France-Merrick Foundation, both based in Baltimore, allocate 30% of their AUM to hedge funds and have invested previously in funds with a track record of three years or less.
Almost all (92%) institutions that invest in hedge funds with a track record of three years or less are based in North America (Fig. 8). In contrast, investors in funds with $300mn or less in AUM are
more geographically diverse: a significant proportion (38%) are based in Europe; for example, London-based Clerville Investment Management invests in firsttime funds with a requirement of only €100mn in AUM.
There were significant outflows from the hedge fund industry in 2016; however, with better overall performance in the last few quarters, the beginning of 2017 saw investor inflows for the first time in five successive quarters. This has set the tone for emerging managers in the hedge fund industry; with the performance of first-time funds stronger than that of the wider hedge fund industry, now could be a prime opportunity for new hedge fund managers. Notably, younger funds (those with a track record of three years or less) have generated strong returns, achieving higher net returns than small funds. This stronger performance may encourage institutional investors to look past the risks of these first-time funds and find opportunities with emerging managers. Indeed, the volatility of the funds with a track record of three years or less has lessened and converged with that of the wider hedge fund industry, indicating that investors can access better returns with comparable investment risk.
Hedge Funds And Brexit: One Year On
One year ago, two days before the UK EU referendum, Preqin released a report looking at the views of hedge fund managers on this important vote. At the time, we found that 71% of hedge fund managers predicted that the UK would choose to remain in the EU. However, with a small majority of 52% of the UK populace voting for Brexit, the UK is now on course to leave the EU by March 2019.
Here, we look at the impact of Brexit on the hedge fund industry one year on from the referendum. Preqin surveyed hedge fund managers in June, July and November 2016 and in June 2017 to assess how the UK’s decision to exit the EU is affecting the hedge fund industry in terms of their investments and performance as well as where they choose to be headquartered.
We review the latest news from the hedge fund industry, including California-based investors planning new investments in the coming year, as well as new North America-based hedge funds launched so far in 2017. Plus, our Chart of the Month looks at industry asset flows since 2015.
California-based Investors Planning New Investments
California-based investors target a range of hedge fund strategies across various locations (see page 12 for more information). Sacramento County Employees’ Retirement System (SCERS) is looking to invest between $25mn and $75mn in new funds over the next 12 months. The pension fund is not targeting any specific fund strategies, and it will look for opportunities on a global basis.
In the coming year, Silicon Valley Community Foundation (SVCF) plans to invest up to $30mn in hedge funds. The foundation is targeting hedge funds that employ long/short equity strategies.
Recent North America-based Hedge Fund Launches
There have been 11 hedge funds launched by North America-based managers since the beginning of 2017, including Cerebellum Capital’s Cerebellum Machine Learning Fund, L.P., which was established in April. The fund uses artificial intelligence to select positions in its portfolio and employs a multi-strategy approach with a focus on US markets.
Legion Partners Special Opportunities V is an activist fund launched in February by Legion Partners Asset Management. It utilizes event driven strategies and takes positions in small- and mid-cap North American companies.
New North America-based Fund Managers
The majority (67%) of all active hedge fund managers are located in North America (see page 3). Preqin’s Hedge Fund Online currently tracks 20 managers headquartered in the region that have been established in 2017 so far. California-based Arts & Sciences was established earlier this year, led by former Smithwood Advisors Partner Cyrus Hadidi. It plans to pursue a long/short equity strategy and, to a lesser extent, distressed debt and corporate junk bonds.
Parplus Partners, a New York-headquartered hedge fund manager, launched this year with original backing from Ronin Capital. It employs event driven, long/short equity, macro and relative value arbitrage strategies and focuses on the European and US markets.
Hedge funds generated a small positive return (+0.23%) for May 2017, the seventh consecutive month of positive performance. Equity strategies funds were the biggest winner for May having posted returns of +0.46%, helping bring the Preqin All-Equity Strategies Hedge Fund benchmark to +5.85% for 2017 YTD, the highest of any top-level strategy. Europe- and Asia-Pacific-focused funds also performed well in May returning +1.00% and +0.83% respectively.
Returns across various currency denominations for May were mixed, with JPY-denominated funds generating the highest return of +1.01%. This comes after the currency depreciation of the Japanese yen increased external demand for exports, helping to boost growth of the Japanese economy. Meanwhile the corruption scandal surrounding Brazilian President Michel Temer may have contributed to the loss posted by Brazilian real funds of -1.17%.
Activist Fund Performance
We examine the performance of activist hedge funds, including launches in 2017 and top performing activist hedge funds by 12-month return.
California-based Hedge Fund Investors
We examine the make-up of hedge fund investors based in California by type, location, strategy preference and more.
UCITS Hedge Funds
We examine the latest data on UCITS hedge funds, including launches and liquidations, fund managers over time and assets under management.
Fund Searches And Mandates
We analyze the fund searches and mandates issued by hedge fund investors in May 2017.
Article by Preqin