Early signs of a Renaissance in Emerging Manager Hedge Fund Returns?
Transcript of Early signs of a Renaissance in Emerging Manager Hedge Fund Returns?
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By Peter Urbani, KnowRisk Consulting
Early signs of a renaissance in Emerging ManagerHedge Fund Returns ?
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Emerging Manager Funds (defined here as those Hedge Funds Funds which are lessthan 36 months old and have less than $300m in AUM) tend to be run by highlymotivated, entrepreneurial and focused managers.
In addition, the exploitable opportunity set they have identified in the marketplaceis more likely to persist over the short-term.
Simply putEmerging / 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 businessrisk associated with a start-up operation.
Why Emerging Managers ?
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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 backfilland / 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 toestablished managers , typically after crisis periods, however the drawdownsassociated with Emerging Managers are also lower.
Why Emerging Managers ?
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Average Returns decrease with time
Average 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
Returns(Ann
ualised)
Avg Ann Returns per no of months
Avg Ann Returns - All periods
The Seven Year Itch ?
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Emerging vs. Established Returns
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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
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Emerging vs. Established ReturnsEmerging Managers versus Established Managers
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
Emerging Managers less than 24 months old and less than$200m AUM
Established Managers older than 24 months
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Emerging vs. Established ReturnsEmerging Managers versus Established Managers
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 Managers less than 36 months old and less than$300m AUM
Established Managers older than 36 months
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Emerging vs. Established Statistics
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What about Survivorship Bias ?
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Only 20% of Funds ever exceed $1bn
Time to achieve AUM Milestones versus % Achieving AUM
1416
26
587
449345
237
131
7.80%9.39%
11.68%15.27%
21.19%
3.72%
0100
200
300
400
500
600
700800
900
1000
1100
1200
1300
14001500
0 5 10 15 20 25 30 35 40 45 50 55 60
Average time in Months
AUM$
m
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
%A
chievin
gAUM
Average Fund Size at t ime
% of Funds achieving AUM
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Emerging Manager AlphaEmerging 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
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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
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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
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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
Established Managers older than 36 months
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After struggling mightily post the GFC there are finally some early signs of a possiblerenaissance in Emerging Manager excess returns or Emerging Manager Alpha.
The recent downturn was caused by ongoing fallout from the GFC, uncertaintyabout 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 over10,000 funds
More importantly, Fund of Funds which were a major source of seed capital forEmerging Managers have finally stopped hemorrhaging AUM.
As a result we expect to see continued improvements in relative outperformancefrom Emerging Managers as hedge fund issuance / new launches picks up.
Conclusions
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Emerging Manager AlphaEmerging 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
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Emerging v.s. Established Returns
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PersistenceReturnRisk
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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 otherinvestment 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.
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