Emerging Managers : Playing an important part in today’s troubled markets

It’s an interesting time in the seeding/emerging manager space as the current market environment is making it even more difficult for new funds to get off the ground. Investors are increasingly allocating to ‘safe’ investments, giving capital to larger, more established hedge funds. Yet, a large volume of independent research continues to indicate that early stage/smaller managers will outperform these large, more established funds. So why are investors apparently foregoing the most profitable years of a hedge fund’s life cycle? And where does that leave emerging managers? Whilst it is true that the attrition rate for hedge funds is highest in the first 3 years of their life, the majority of failures are proven to occur at the operational and not the performance level. The determining risk factor has proven to be not the amount of assets under management or performance track record of the fund, but the quality, independence and strength of the operational and control environment. But the days of ‘two-men-and-a-bloomberg’ are long gone. Indeed, recent research conducted by SEI on institutional hedge fund investors concluded that a hedge fund’s infrastructure is even more important that a hedge fund’s performance in the manager selection process1. The majority of emerging managers are adjusting to this demand by partnering with platforms, housing themselves in hedge fund ‘hotels’ or investing heavily in operations to meet the requirements of institutional investors. The perception that start-up hedge funds do not have the necessary infrastructural support to mitigate operational risk is no longer the right one. Having a robust operational infrastructure is now essential for a fund of any size to attract and retain investors. Looking for a safe haven Importantly, operational implosions are not only the preserve of small, early stage funds, as recent events have reminded us. Investing in a big name hedge fund is no longer a guarantee that your money is safe; being a big name or a smaller start-up is not in itself synonymous with success or failure.

By KAREN PAGE, VCM FUND MANAGEMENT LLP

The article is on :
http://www.thehedgefundjournal.com/magazine/200810/commentary/emerging-managers.php