Early signs of a Renaissance in Emerging Manager Hedge Fund Returns?

8/11/2019 Early signs of a Renaissance in Emerging Manager Hedge Fund Returns?

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KnowRisk Consultingwe crunch the numbers so you don't have toKnowRisk Consultingwe crunch the numbers so you don't have to

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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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




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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




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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



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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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Past performance is not guarantee of, and cannot be construed as an indication of, future results.