Updated Do Emerging Managers add value ( June 2014 )
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Transcript of Updated Do Emerging Managers add value ( June 2014 )
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By Peter Urbani, KnowRisk Consulting
Early signs of a renaissance in Emerging Manager Hedge Fund Returns ?
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• 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 ?
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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 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 ?
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Average Returns decrease with timeAverage Hedge Fund Returns versus no of M onths
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 126No of M onths
Returns ( A
nnua
lised
)
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 ReturnsEm erging M anagers versus Established M anagers
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
Em erging M anagers less than 12 m onths old and less than$100m AUMEstablished M anagers older than 12 m onths
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Emerging vs. Established ReturnsEm erging M anagers versus Established M anagers
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
Em erging M anagers less than 24 m onths old and less than$200m AUMEstablished M anagers older than 24 m onths
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Emerging vs. Established ReturnsEm erging M anagers versus Established M anagers
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
Em erging M anagers less than 36 m onths old and less than$300m AUMEstablished M anagers older than 36 m onths
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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 $1bnTim e to achieve AUM M ilestones versus % Achieving AUM
1416
26
587
449345
237131
7.80%9.39%11.68%
15.27%21.19%
3.72%
0100200300400500600700800900100011001200130014001500
0 5 10 15 20 25 30 35 40 45 50 55 60Average tim e in M onths
AUM $m
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
% A
chieving
AUM
Average Fund Size at tim e% of Funds achieving AUM
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Emerging Manager ‘Alpha’Em erging versus Established M anager '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
M orningStar EM Alpha Eurekahedge EM Alpha
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Fund of Funds Flows finally turn upNet Asset Flows to Fund of Hedge Funds 1990 – Q 2 2014
($120,000)
($80,000)
($40,000)
$0
$40,000
$80,000
$120,00019
9019
9119
9219
9319
9419
9519
9619
9719
9819
9920
0020
0120
0220
0320
0420
0520
0620
0720
0820
0920
1020
1120
1220
1320
14
Source: HFR
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Number of Funds recoveringNum ber 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 ReturnsEm erging v.s. Established M anager 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 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
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Emerging Manager ‘Alpha’Em erging versus Established M anager '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
M orningStar 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 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.