WHY INVESTORS SHOULD CONSIDER INVESTING IN EMERGINGMANAGERS

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WHAT IS AN EMERGING MANAGER?

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• Typically, emerging managers operate newly formed funds with a relatively small asset base.

• Small funds under $100M represent more than 60% of the hedge fund universe. However, larger funds of over $500M represent over 85% of total hedge fund assets. *

• Minority-controlled firms such as women-run hedge funds, are sometimes considered a part of the emerging manager space.

Easier to execute certain strategies with fewer assets

Manager can remain focused and nimble on execution

*According to a study by BarclayHedge

PERFORMANCE

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According to a Preqin study, first-time funds have generally posted superior returns during their first 3 years compared to the those of funds launched by veteran fund managers.

YEAR 1 YEAR 3 YEAR 5 YEAR 7

Since 2007, the average emerging manager long/short fund returned 8.8% net of fees in its first three years of trading while established managers returned 5.38%.

EMERGINGMANAGERS

ESTABLISHEDMANAGERS

However, emerging managers experienced more volatile returns compared to established managers.

Sharpe Ratios were similar for both emerging and established managers across all strategies

REASONS FOR OUTPERFORMANCE

In order to survive, emerging managers need to outperform their peer group to attract assets

and build their business.

Emerging managers tend to be more nimble in making investment decisions while not having to deal

with bureaucratic and approval structures inherent in bigger firms.

Emerging managers can also invest in smaller

investments that are simply too small for multi-billion

dollar managers.

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THE DIFFERENCE IN FEES

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• Established managers generally tend to deal with more institutional investors.

• Emerging managers have the rely more on performance-based compensation.

A large AUM means proportionally large management fees.

This leads to more aggressive and risky strategies, which translate into potentially higher returns with more volatility and greater potential losses.

As institutional investors tend to be more risk averse, established managers may not want to alter their risk-return profile for the possibility of greater returns.

ADVANTAGES EMERGING MANAGERS HAVE

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Emerging managers can begin with a blank slate, as opposed to

established managers with legacy operational inefficiencies.

NEW MANAGERS

Can learn from mistakes made by managers in the past.

Are less likely to be plagued with an unhealthy firm culture, old operational and technological

systems, and unqualified employees.

Typically, building an operation from scratch today will result in more efficiency than building off of old legacy systems from ten years ago.

GROWING INSTITUTIONAL INTEREST INEMERGING MANAGERS

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Pension funds and endowments are increasingly setting mandates to invest in emerging managers.

A program introduced by the North Carolina Department of State Treasurer

required the Equity Investment Portfolio to include emerging managers.

The 3 largest pension funds in the U.S. have mandates for including allocations to

emerging managers that are majority-owned by people who have been

underserved or excluded from the industry, such as minorities or women.

These initiatives serve to seek the highest ROI as well as the additional social benefit in supporting SME’s in the

community.

CHALLENGES EMERGING MANAGERS FACE

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Raising capital is difficult for firms without an extensive track record.

• Oftentimes a new manager will launch with seed money raised from friends and family.

• Early performance will allow the fund manager to market a track record of solid returns to outside investors.

• Crucial to form a quality investment team, good operational infrastructure, and trustworthy service providers. Without these resources, managers have to divert their time & energy away from investment strategy execution.

• An increasing option: Emerging managers take on a strategic partner that provides capital in exchange for economic benefits into the hedge fund.

EMERGING MANAGERS REPRESENT HIDDEN TALENT

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• Many emerging managers rise from established hedge funds or private equity firms.

• Talented managers take this legacy information and experience with them while also taking advantage of the benefits inherent in being an emerging fund.

• The biggest funds dominate the attention of institutional investors, leaving an opportunity for other investors to source hidden and often overlooked talent.

• The advantages present in emerging funds may be worth the due diligence required to sort out and find emerging talent in an increasingly fragmented hedge fund space.

CONCLUSION

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