Emerging Managers Have Delivered Twice the Returns of Established Managers
| Jun 21st, 2012 | Filed under: Hedge Fund Industry Trends, Today's Post | By: Guest |
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By Peter Urbani*
Emerging Hedge Funds, defined here as those funds with less than 36 months of history and whose AUM < $300m, have generated excess compound average annual returns of +3.66% per annum over and above the return of their older ( > 36 month ), typically larger, brethren. This geometric rate of excess return compounds out to just under +100% cumulative over the 19.25 year period to end March 2012. It represents an arithmetic excess return, or alpha if you will, of +4.13% per annum.
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[...] New hedge funds deliver better [...]
[...] Source: http://allaboutalpha.com/blog/2012/06/21/emerging-managers-have-delivered-twice-the-returns-of-estab... [...]
For dead emerging funds, the losses could easily be 30%+. Will this change the picture?
The losses for all dead funds assumed to be -100% once they leave the dataset so no difference between emerging and established funds. However what will make a difference is if emerging managers have a materially higher attrition rate. In the case of seeding or incubation funds
The losses for all dead funds assumed to be -100% once they leave the dataset so no difference between emerging and established funds. However what will make a difference is if emerging managers have a materially higher attrition rate. In the case of seeding or incubation funds I would say that this is probably true as the two major obstacles emerging managers face are 1 ) transitioning from successful portfolio managers to successful businesses without taking their eye off the performance ball and 2 ) raising AUM. Those that fail tend to do so fairly quickly. Assessing these additional business risks is why there is a higher due diligence requirement for selecting such managers and may be one reason why institutions do not appear to be allocating to them in size yet. In a recent TowersWatson pension fund survey only 33% of respondents said that have sufficient internal governance or risk management processes to monitor these types of investments.
All of these sorts of studies can quickly become rather esoteric and theoretical. What I can show is my experience of running two Emerging Manager manadate ( One 50% Emerging & 50% Established ) funds of funds on behalf of ABN Amro and some Asian Institutional clients during the crisis period from 2005 to end 2008. The numbers as follows:
Conquistador II Sub-Trust ( CONQUII KY ) CAGR : 3.98% 2008 : -12.05%
Invenio Sub-Trust ( INFINVU KY )* CAGR : 4.93% 2008 : -11.69%
HFRI US Fund of Funds Index CAGR : 0.70% 2008 : -20.85%
S&P500 TR CAGR : -5.21% 2008 : -37.00%
3m LIBOR CAGR : 4.22% 2008 : 2.79%
* Unleveraged USD Class
On that basis the ‘pure’ emerging manager fund beat cash by 71p.b, Established Funds by 423b.p and Blend by 96b.p. Those are real world after cost performances on just under $300m.