The recent announcement by CalPERS, the largest pension fund in the world, that it was exiting entirely from hedge funds has led some to speculate that this heralds the end for hedge funds. However, the recent fund flows data tend to refute this, suggesting that there are still signs of life for hedge funds and even for smaller funds and funds of funds.
The recent announcement by CalPERS, the largest pension fund in the world, that it was exiting entirely from hedge funds has led some to speculate that this heralds the end for hedge funds. However, the recent fund flows data tend to refute this, suggesting that there are still signs of life for hedge funds and even for smaller funds and funds of funds.
The recent announcement by CalPERS, the largest pension fund in the world, that it was exiting entirely from hedge funds has led some to speculate that this heralds the end for hedge funds. However, the recent fund flows data tend to refute this, suggesting that there are still signs of life for hedge funds and even for smaller funds and funds of funds.
KnowRisk Consulting we crunch the numbers so you don't have to By Peter Urbani, KnowRisk Consulting Early signs of a renaissance in Emerging Manager Hedge Fund Returns ? KnowRisk Consulting we crunch the numbers so you don't have to KnowRisk Consulting we crunch the numbers so you don't have to 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 ? KnowRisk Consulting we crunch the numbers so you don't have to KnowRisk Consulting we crunch the numbers so you don't have to
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 ? KnowRisk Consulting we crunch the numbers so you don't have to KnowRisk Consulting we crunch the numbers so you don't have to 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 R e t u r n s
(
A n n u a l i s e d
) Avg Ann Returns per no of months Avg Ann Returns - All periods The Seven Year Itch ? KnowRisk Consulting we crunch the numbers so you don't have to KnowRisk Consulting we crunch the numbers so you don't have to Emerging vs. Established Returns KnowRisk Consulting we crunch the numbers so you don't have to KnowRisk Consulting we crunch the numbers so you don't have to Emerging vs. Established Returns Emerging 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 KnowRisk Consulting we crunch the numbers so you don't have to KnowRisk Consulting we crunch the numbers so you don't have to Emerging vs. Established Returns Emerging Managers versus Established Managers 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 Emerging Managers less than 24 months old and less than $200m AUM Established Managers older than 24 months KnowRisk Consulting we crunch the numbers so you don't have to KnowRisk Consulting we crunch the numbers so you don't have to Emerging vs. Established Returns Emerging Managers versus Established Managers 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 Emerging Managers less than 36 months old and less than $300m AUM Established Managers older than 36 months KnowRisk Consulting we crunch the numbers so you don't have to KnowRisk Consulting we crunch the numbers so you don't have to Emerging vs. Established Statistics KnowRisk Consulting we crunch the numbers so you don't have to KnowRisk Consulting we crunch the numbers so you don't have to What about Survivorship Bias ? KnowRisk Consulting we crunch the numbers so you don't have to KnowRisk Consulting we crunch the numbers so you don't have to Only 20% of Funds ever exceed $1bn Time to achieve AUM Milestones versus % Achieving AUM 1416 26 587 449 345 237 131 7.80% 9.39% 11.68% 15.27% 21.19% 3.72% 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 1400 1500 0 5 10 15 20 25 30 35 40 45 50 55 60 Average time in Months A U M
$ m 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% %
A c h i e v i n g
A U M Average Fund Size at time % of Funds achieving AUM KnowRisk Consulting we crunch the numbers so you don't have to KnowRisk Consulting we crunch the numbers so you don't have to Emerging Manager Alpha Emerging 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 KnowRisk Consulting we crunch the numbers so you don't have to KnowRisk Consulting we crunch the numbers so you don't have to Fund of Funds Flows finally turn up Net Asset Flows to Fund of Hedge Funds 1990 Q2 2014 ($120,000) ($80,000) ($40,000) $0 $40,000 $80,000 $120,000 1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 Source: HFR KnowRisk Consulting we crunch the numbers so you don't have to KnowRisk Consulting we crunch the numbers so you don't have to Number of Funds recovering Number of Hedge Funds and FoF 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 11000 1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 FoF HF Source: HFR KnowRisk Consulting we crunch the numbers so you don't have to KnowRisk Consulting we crunch the numbers so you don't have to Emerging vs. Established Returns Emerging 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 Established Managers older than 36 months KnowRisk Consulting we crunch the numbers so you don't have to KnowRisk Consulting we crunch the numbers so you don't have to
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 KnowRisk Consulting we crunch the numbers so you don't have to KnowRisk Consulting we crunch the numbers so you don't have to Emerging Manager Alpha Emerging 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 KnowRisk Consulting we crunch the numbers so you don't have to KnowRisk Consulting we crunch the numbers so you don't have to Emerging v.s. Established Returns KnowRisk Consulting we crunch the numbers so you don't have to KnowRisk Consulting we crunch the numbers so you don't have to Persistence Return Risk KnowRisk Consulting we crunch the numbers so you don't have to KnowRisk Consulting we crunch the numbers so you don't have to 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 Consultings 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.