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New Managers June 2013

Focus - The plight of emerging managers, and the general partnership solution

With the increased compliance and regulatory oversight, small and emerging fund managers have to deal with higher costs while at the same time struggle to attract assets; they are being pinched by those two different critical business components. Mrs. Jones of Rothstein Kass describes the current trends and challenges that small and emerging managers are currently encountering, and Mr. Allan of LAIC proposes a solution.

It never was easy to launch a new business, including a new hedge fund. But why has it become so much more challenging of late? According to Meredith Jones , director of research at Rothstein Kass, a large U.S. accounting and auditing firm, this is due to a flight to quality that took place after the 2008 crisis and the Madoff scandal. This flight to quality meant investors going to the larger fund managers.

Meredith Jones Now, around 90% of the industry's capital is in the billion dollar club. The remaining 9,600 funds, she tells Opalesque, are struggling to get assets and keep their business alive. If this goes on, she adds, "it can have the unfortunate effect of homogenizing the industry, because a lot of larger firms tend to look fairly similar, they tend to become more multi-strategy firms at that point in order to put the money to work. And a lot of the alpha is actually in these smaller funds."

Indeed, empirical data clearly shows that young funds (less than four years old) and smaller funds (with less than $100m) outperform their more tenured and larger competitors.

 

 

Jones explains why smaller funds produce the alpha:

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This article was published in Opalesque's New Managers a top-down monthly analysis, news and research publication on the global emerging manager space.
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