Enhancing Portfolio Returns With Emerging Managers

Emerging hedge fund managers are often overlooked by the institutional investor community. They are deemed too small to make an impact on the bottom line and too risky in terms of institutional mandate and consultant reputation. In a recent Preqin surveyi, the data provider noted that 71% of institutional investors will not invest in a hedge fund without at least a two-year track record. This reluctance to invest in young funds provides opportunities for investors to capture excess returns from Emerging Managers. In this paper, we outline the case for investing in funds managed by emerging managers.

While there is no fixed definition of what makes an “Emerging Manager”, in general, managers are thought to be ‘emerging’ if they are small or young (or both). Of course, ‘small’ and ‘young’ refer to the fund and not the manager; Emerging Managers are often experienced managers in new vehicles. Most research classifies managers as emerging or young if they have less than one billion in capital and less than a three-year track record.

Emerging Managers are often more motivated, nimble, creative, and have less organizational bureaucracy than their established hedge fund manager counterparts. Furthermore, opportunity sets for smaller managers are often far less constrained than those of larger managers. For these reasons, several studies by academics and hedge fund data providers have shown that, as a group, Emerging Managers outperform more established funds in the same discipline.